New Media Legal Q&A

Refresh Annapolis Valley
Technology Start-Ups, Licensing and the Law
presents
With…
Martin Glogier -and- Marc Comeau

Agenda
Refresh Annapolis Valley May 13, 2013 Slide 2

Part 1: Organizing Your Business
• Models for Organizing Your Business
Sole Proprietorship
Joint Venture
Partnership
Incorporation
Less Formal
Requirements
More Formal
Requirements

• Sole Proprietorship
• Business entity that is owned and run by
one individual.
• Owner receives all profits directly
(direct taxation).
• Owner has unlimited responsibility
for all losses and debts.
• No legal distinction between the owner
and the business.
• Key advantage: easy to organize and
no formal formation or reporting
obligations.
• Key disadvantage: unlimited, personal liability.

• Partnership
• Sole proprietorship with multiple people.
• Direct taxation of each partner; and
• Partners have personal liability for losses and debts.
• Deemed to exist where two or more persons:
• Are carrying on a business;
• In common; and
• With a view to profit.
• Types of partnership: (1) general (most common); (2) limited; and (3) limited
liability (LLP).
• Every partner is an agent of the partnership (unless modified by agreement).
• Key advantage: ability to raise capital is better vis-à-vis sole proprietorship.
• Key disadvantage: unlimited, personal liability and implied authority to bind all
partners.
• Manage this risk by creating limited partnership.

• Joint Venture
• Two or more parties agree to pool their resources/skills for the purposes of
accomplishing a specific project.
• Each participant responsible for its own profits, losses, and costs and taxes
associated with the venture.
• No transfer of ownership (not a merger).
• Venture can be its own entity, separate and apart from participants’ other
business interests.
• Way JV is set up affects how the JV is managed and how profits are shared and taxed.
• Key difference from partnership: not a continuing relationship.
• Key advantage: “two heads are better than one”.
• Key disadvantage: potential for abuse/power imbalance and limited recourse
under the law outside the bounds of the Joint Venture Agreement.

• Incorporation
• A separate legal entity under the law; exists as its own “person”.
• Owned by shareholders.
• Run by directors and officers (can be the same as shareholders).
• Key advantages:
• Flexibility to shield personal income from income tax (corporate rates, dividends,
expense write-off);
• Limited liability (instead of unlimited, personal liability); and
• Ability to raise funds (share issuance).
• Key disadvantages:
• Legal responsibilities and obligations on directors and officers;
• Procedural requirements (formation and reporting obligations); and
• Start-up costs (fees for incorporation).

• Which Business Entity Should I Use?
• Two key considerations:
• How much money are you making and how much do you need?
• Revenues
• Ownership of business assets
• Financing
• Complexity and scope of business – multi-jurisdictional
• How much exposure do you have to being sued?
• Nature and complexity of contracts
• Nature of services and equipment
• Negligence
• Occupiers’ liability
• Employees/employment law

• Protecting Creativity: Intellectual Property Rights
• IP rights relevant to computer programs:
• Patents (limited application)
• Copyright
• Not relevant:
• Industrial Design
• Trade-marks
(domain names)
Part 2: Protecting and Sharing Your Code
Intellectual
Property
Patents
Copyright
Trade-
marks
Industrial
Design

• Intellectual Property Rights: Patents
• A patent grants a monopoly to the patentee to exploit an invention for
20 years.
• Patentee gains an exclusive right to make, construct, use and sell the invention.
• Patentee is the owner of the patent; not necessarily the inventor.
• Entitlement to a patent is determined on a “first-to-file” basis rather than a “first-to-
invent” basis.
• If there are two pending patent applications claiming the same or overlapping
inventions, the application with the earlier filing date will be entitled to the patent.
• Indicates importance of secrecy!
• U.S. and Philippines only 2 remaining countries with “first-to-invent” system.

• Intellectual Property Rights: Patents (Continued)
• Patent granted for any “new” and “useful” invention.
• “Invention” includes processes, machines, manufactures or compositions of matter.
• Invention will not be “new” if there has been “enabling disclosure” to the public (in
Canada or elsewhere) more than 1 year prior to date of application.
• Also indicates importance of secrecy!
• “Useful” means the invention must have practical application (useful in theory is
insufficient).
• If a patent is infringed, patentee can recover money, including:
• Any damages suffered as a result of infringement; and
• Disgorgement of the profits made by the infringer as a result of the infringement.

• Patentable subject matter:
• Subject matter that has been excluded from patent protection:
• Computer programs if the discovery involved is a method of calculation;
• Methods of medical treatment;
• Higher life forms;
• Professional skills and methods;
• Printed matter producing only an artistic, intellectual or literary result;
• Mere human conductor mental steps or instructions; and
• Architectural plans.
• Therefore, patents are not available for all types of software and do not protect
source code underlying that software.

• Patentable subject matter – computer software:
• The practical application of source code for a new purpose is patentable, but the
code itself is not protected by patent.
• Best way to explain the distinction:
If a computer program does something in the real world,
you can patent how it does what it does
(e.g. Google’s PageRank algorithm).
But the program itself (and its components, including the
code) may be rejected as being “mathematical
algorithms” or “purely mental steps”.

• Practical Considerations:
• Obtaining a patent is not practical for the small business owner.
• Astronomical costs.
• Highly specialized area of the law – “patent agents”.
• Only 1 in all of Nova Scotia!
• Only makes sense when potential revenue from the invention reaches six figure
marks.
• Products that are the “next best thing”.
• Cost hurdles mean that patent protection is typically reserved for the realm of the
mega-corporation or independently wealthy.

• Intellectual Property Rights: Copyright (and Trade Secrets)
• Just because your code or software is not patentable or under patent,
that does not mean it is not protected from reproduction under the law!
• Computer programs and code can also be protected by:
• The common law relating to “trade secrets”; and
• Copyright.
• “Trade Secret”:
• Protection for confidential information.
• Arises more from an obligation of good faith and fiduciary relationship rather than
from a proprietary interest.
• Any formula, pattern, device or compilation of information that is secret, unique, and
is developed by expending time, effort or money.
• Must be communicated or acquired in circumstances where an obligation of
confidence is imposed.

• Intellectual Property Rights: Copyright (and Trade Secrets)
• Test to determine whether there has been a breach of a “trade secret”:
• Was the information that was conveyed confidential?
• Was it communicated in confidence? and
• Was it misused by the party to whom it was communicated?
• Therefore, where you are developing a new product/program for a
commercial purpose in concert with others, ensure that confidentiality or
non-disclosure agreements are being used to protect against
unauthorized reproduction of your work.

• Intellectual Property Rights: Copyright
• Copyright:
• Protects personal expression.
• Distinct from patent protection, in that patents cover function.
• An author of an original artistic, literary, dramatic or musical work (and compilations
of such work) is given an exclusive right to produce, reproduce and sell the work or
any substantial part thereof.
• Code generally protected as “literary” work, encompassed by statutory definition of
“computer program”.
• Software protected as a compilation of “literary” works (fragments of code which create an
original result).
• Note that copyright protects the form of expression of an idea, not the idea itself.
• Unique feature of copyright in Canada: protection of moral rights associated with an
original work.
• Right to prevent distortion or mutilation of the work and the right to prevent the use of the
work in association with a particular product, service, cause or institution.

• Intellectual Property Rights: Copyright (Continued)
• Copyright protection exists automatically from the moment of creation,
and lasts for life of author plus 50 years from date of author’s death.
• Despite automatic protection, there are benefits to registering copyright
with the Canadian Intellectual Property Office (CIPO).
• Prima facie evidence of ownership in copyright if a dispute arises.
• Infringement of copyright is doing anything with a copyrighted work (or
authorizing this conduct) which the owner of the copyright has the
exclusive right to do.
• There are exceptions, including:
• Fair dealing for purposes of research, private study, criticism or news.
• If copyright is infringed, owner can sue for:
• Damages and an accounting of profits; or
• Statutory damages (penalty).

• Infringement (illegal reproduction) of a computer program can happen
in numerous ways:
• Literal infringement
• When the code of the computer program is copied on a one-for-one basis; or
• Used in contravention to provisions of a licensing agreement.
• Non-literal infringement: “look and feel” copying
• Where the code has not been copied line-for-line; but
• The “look and feel” (e.g. screen prompts, keystrokes, menus) of the program is substantially
copied.
• This protects against reproduction through the use of different programming language.
• “Look and feel” is subjective and difficult to quantify.
• Don’t forget about moral rights!

• In any economic transaction involving copyrighted works, the transfer of
rights becomes essential:
• Partial or total assignment of copyright (transfer of ownership in work); or
• Exclusive or non-exclusive licensing (rights to use the work).
• Therefore, marketing, selling or sharing code generally requires an
assignment or license agreement.
• Implied licenses may arise where work is done on behalf of another person (e.g. web
design).

• Practical difficulties with copyright and software/code:
• Are pieces of code actually “expression”? Difficulty of separating purely functional
aspects of code from expressive elements of codebase.
• Who is the “author” of software where one person creates the concept and
specifications for the program, and another creates the code (independently)?
• Serious enforcement issues – impossible to police, particularly with online
dissemination and digital media.
• Coders interested in protecting their work should seriously consider taking preventative
action rather than relying on copyright “protection”.
• Use products to obfuscate source code or resist or detect tampering.
• Nature of copyright is in conflict with the shared nature of culture.
• An inappropriate model to deal with open-source software, creative commons, etc.

• Managing and Sharing Your Code: Licenses
• Licenses are the means by which you share or distribute your intellectual
property rights.
• When a consumer buys a computer program, they generally do not buy
the program itself, but a license to use the program.
• Terms of this use are set out in the EULA, Terms of Use or General License Agreement.
• A “license” is simply a binding agreement (or contract) that sets out how
the IP can be used.
• Three fundamental features of any IP license:
• Gives people permission to use someone else’s intellectual property;
• Allows IP holders to put bounds and conditions on the use of their IP; and
• Allows IP holders to exercise their property rights if the bounds and conditionsof the
license are not met.

• Managing and Sharing Your Code: Licenses (Continued)
• Key pieces of a good and valid license:
• Grant of the license;
• Grant of Copyright License. Subject to the terms and conditions of this Agreement, [IP holding party] hereby grants to [the
other party] a worldwide, non-exclusive, royalty-free copyright license to reproduce, prepare derivative works of, publicly
display, publicly perform, sublicense, and distribute the work and associated derivative works.
• Limitations on the scope of use; and
• Common examples:
• Exclusivity;
• Sublicensing;
• Field of Use/Product;
• Term; and
• Territory.
• Reservation of rights.
• Reservation of Rights. All rights not expressly granted under this Agreement are retained by [the IP holder]. Any use not
expressly granted is reserved. Further, this Agreement does not restrict or limit [IP holder’s] rights to utilize or license the
works in any manner.

• Your options:
• No license
• Relying on traditional copyright protection and preventive measures; or
• Keep in mind the practical difficulties with this.
• Putting your work into the public domain (free use).
• Generally where the rewards of seeing others enjoy your work is more valuable than the financial
rewards associated with copyright.
• This applies to work provided for Creative Commons.
• Public domain declaration:
• The contents of this file are dedicated to the public domain. To the extent that dedication to the public domain is
not available, everyone is granted worldwide, perpetual, royalty-free, non-exclusive license to exercise all rights
associated with the contents of this file for any purpose whatsoever. No rights are reserved.
• Include moral rights declaration.

• Your options (continued):
• Traditional proprietary software license
• Shrink-wrap or click-wrap licenses are acceptable under Canadian law.
• Be careful of the browse-wrap license – may not be enforceable on grounds that reasonable
notice of the terms of the license were not brought to the attention of the user such that
there is no mutual agreement to those terms.
• Open source license
• Middle ground between public domain and proprietary licensing.
• Options for open source licenses fall on a scale regarding complexity of the license and the
amount of control that the IP holder wants to exercise.
• When choosing license for new code incorporating existing code, ensure license you choose
is compatible with pre-existing license.
• If your code is intended for use with an existing open source project, use the predominant
license.

• Scale for open source licenses:
• Academic Licenses;
• Permissive Licences;
• Partially Closed Licenses; and
• Reciprocal Licenses.
• Examples of the most comprehensive and common open source licenses:
• 2-clause BSD License (academic);
• Apache License v. 2.0 (permissive);
• Mozilla Public License (MPL) (partially closed);
• Lesser/Library GPL (LGPL) (partially closed);
• GNU GPL v. 3.0 (reciprocal); and
• If you work with reciprocally-licensed code, know the risks!
• Open Software License v. 3.0 (reciprocal).

Part 3: Legal Issues Relevant to Tech
• Common Legal Issues – E-Commerce and the Internet:
• Intellectual property issues
• The internet and associated technology have made the storage, reproduction and
widespread distribution of protected works inexpensive and fast.
• Hence the development of open source and creative commons concepts.
• To minimize your risks of being found an infringer, check licenses of all products you
use/incorporate into your own work.
• In order to minimize the risk of your work being infringed, implement a
comprehensive licensing system and protect your work as “trade secrets”.
• Register your copyright with the Canadian Intellectual Property Office (CIPO).

• Common Legal Issues – E-Commerce and the Internet
(Continued):
• Privacy issues
• E-commerce activities often involve the exchange of personal information or data.
• Direct submissions from internet users and “hidden” date – e.g. cookies, sniffers,
internet logs.
• If your business is involved in the collection, use or storage of personal information, it
must follow obligations outlined under PIPEDA and provincial privacy legislation.
• Consent from user; and
• Use information only for specific purposes which have been disclosed to user.
• Unsolicited emails may infringe privacy legislation.

• Common Legal Issues – E-Commerce and the Internet (Continued):
• Defamation and user-generated content:
• The law generally protects the website host from defamatory content published by its
users (see U.S. case – Tamiz v. Google):
• It is no doubt often true that the owner of a wall which has been festooned, overnight, with defamatory graffiti
could acquire scaffolding and have it all deleted with whitewash. That is not necessarily to say, however, that the
unfortunate owner must, unless and until this has been accomplished, be classified as a publisher.
• The standard practice for web host in Canada is:
• (1) Ensure that it is not involved in the publication of the defamatory content (e.g. website
administrator created the content), such that it is purely “user” generated; and
• (2) Remove content if asked by another user.
• Legally, however, it may be that the host has no obligation to remove content unless it was
involved in creating it.

(Continued):
• Web site or content development services – key risks:
• Liability for its third-party suppliers (e.g. errors in content, failure to deliver on time);
• Liability for customer-supplied materials or information (e.g. defamation, IP
infringement).
• Especially if developer has some control over the content used in its developed works.
• Failure by customer to meet its own obligations;
• Loss of ownership (right to re-use) developed or supplied works; and
• Ongoing changes by customer for which developer incurs additional expenses.

(Continued):
• Web site or content development services – mitigating key risks:
• Have a Website and Content Development Agreement which addresses:
• Dependencies of the developer which would affect the scope of its obligations, the
deliverables and the timetables/schedules included in the agreement;
• Remedies for causes beyond the developer’s control;
• Limitations on liability and disclaimers;
• Requirements, restrictions, warranties and indemnities for customer-supplied materials or
information;
• Ownership, licensing, confidentiality and assignment terms;
• Change order procedures; and
• Testing criteria and procedures.

Part 4: Discussion
• Any questions?
• Contact information:
• Martin Glogier Marc Comeau
Associate Lawyer Associate Lawyer
muttarts law firm muttarts law firm
902-678-2157 902-678-2157
mglogier@muttartslaw.ca mcomeau@muttartslaw.ca

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