The recent decision in Software Freedom Conservancy Inc. vs. Best Buy, et al (see http://sfconservancy.org/docs/2010-07-27_dj-opinion.pdf ) has been greeted with hosannas by many in the open source community as “proving” that the GPLv2 is enforceable. I don’t want to be negative, but the value of the precedential value of the case is very limited because it is “default” judgment.  The ruling is effective between SFC and Westinghouse Digital Electronics, LLC, but will have little effect on disputes between other parties. The decision has two lessons: (1) register your copyright as soon as possible (see below) and (2) don’t annoy a federal judge by dropping out of case. The decision does emphasize the importance of registering the copyright in open source software in the Copyright Office because it enables the copyright owner to seek statutory damages (avoiding the difficult question of how to determine “lost profits” for a software programs distributed for free) as well as attorneys’ fees.

The court ruled that Westinghouse Digital Electronics, LLC (“Westinghouse”) had infringed on the copyright in the BusyBox software by failing to comply with the terms of the GPLv2 in its distribution of the Westinghouse high definition televisions (“HDTV”). Although Westinghouse had originally “answered” the complaint, it then withdrew from participation in the suit, apparently due to financial difficulties, and ceased to respond to discovery requests from the plaintiff. If the failure to respond to discovery requests is due to “willfulness, bad faith or fault,” the court can grant a default judgment and Judge Scheidlin granted the motion. The financial problems of Westinghouse are evident through its use of  the “assignment for benefit of creditors” procedure.  The “assignment for benefit of creditors” is a California state law procedure similar to federal bankruptcy law to wind down companies. In this procedure, the company assigns its assets to a third party licensed by California who, then, disposes of the assets and then pays off the creditors of the company. Unlike bankruptcy law, the assignment for benefit of creditors does not “stay” litigation.

As part of the default judgment, the court granted four different forms of relief: an injunction prohibiting Westinghouse from copying and distributing the BusyBox software; statutory damages of $30,000 which it tripled to $90,000; “reasonable attorneys’ fees and costs; and forfeiture of all Westinghouse HDTVs which contain BusyBox software. Statutory damages are unique to copyright law; if the infringement takes place after the “registration” of the copyright in the software (or other work) in the Copyright Office, the copyright owner may seek such “statutory” damages rather than “actual damages” (which are the general basis for damages in the common law system). In addition, the copyright owner who is eligible for statutory damages can also obtain the award of reasonable attorneys’ fees and costs (the award of attorneys’ fees and costs is very unusual under US law).  

The default judgment requires that all of the “well pleaded facts” in the complaint are accepted as true. The court also noted that Westinghouse’s failure to participate in discovery meant that the court could not determine appropriate damages and, thus, awarded the maximum damages and, then, trebled the damages on the basis that the infringement by Westinghouse was “willful”. As a default judgment, the decision has little precedential value because all of the facts are taken as “true”. 

I left the Techonomy Conference early (and very reluctantly) because I had committed to assist my friend Greg La Follette to launch his new brand several months ago. We had a dinner for forty wine lovers. I have enjoyed Greg’s wines for over ten years (in fact, I even assisted him with harvest for two years). Greg has been wine maker for some of the finest Pinot Noir wineries in California, from Flowers to Tandem. He has worked with many of the same vineyards for over 20 years. He was born in Europe, growing up with an old-world view that wine is raised rather than “made”. After studying at UC Davis, he continued on-the-job studies at Beaulieu Vineyard as research viticulturist/enologist with famous Russian wine master, Andre Tchelistcheff. He is particularly adept at explaining the complex interplay between farming (including clonal selection and trimming) and wine making (including yeast selection and fermentation).
The new wines are great. I particularly enjoyed the Sangiacomo Chardonnay and the Van Der Kamp Pinot Noir. If you are interested you can order them from www.lafollettewines.com.

I attended the first day and a half of the Techonomy Conference at Lake Tahoe last week (more about that later). http://techonomy.com/program-outline/. It was great, the most thought provoking conference that I have attended in my professional career. The conference is based on the concept of the fusion of Technology and Economy; unlike most conferences, it has a theme because the organizers, David Kilpatrick, Peter Petre and Brent Schlender, fundamentally conceive of humans as “natural innovators and outsize consumers” and the critical question is “How can we continue to create more abundance for all of us”. The location is spectacular, with expansive views of the mountains from the Ritz Carlton. The organizers framed the issue in the introduction by describing the dichotomy between a world in which technology has provided the individual with more power and choice than any other time, yet the threats to civilization from climate change, new weapons technology and population growth have rarely been greater.   

The conference has a star studded group of speakers from John Doerr, the celebrated venture capitalist from Kleiner Perkins Caufield and Byers, to Eric Schmidt, the CEO of Google, Inc. but it also included more eclectic speakers such as David Christian, the Australian professor who founded the idea of “Big History” and Brian Arthur from the Santa Fe Institute. The panels ranged from discussions of the future of innovation to reinventing the energy economy. 

The first panel provided an example of the Conference’s approach: it included Kevin Kelly, the founder of Wired, Debby Hopkins, Chief Innovation Officer of Citigroup, Eric Schmidt, CEO of Google and Dr. Lisa Randall, a theoretical physicist from Harvard.  Kevin Kelly, founder of Wired, described how technology has enabled humans to succeed in dominating the planet’s ecosystem and, at the same time, this success has changed humans (the rise of cooking and agriculture has reduced the size of human teeth). Eric Schmidt focused on the increasing rapidity of technological change: he noted that humanity had created 2 exabytes of data in all of history up to 2002, but 2 exabytes of data are now created every 2 days and the rate is accelerating. The accelerating amount of data and its accessibility through the Internet to most of human society represents a dramatic change from history when most important information was only available to societal elites.  Debby Hopkins discussed the challenges of bringing new technology into a traditional industry, banking, as well as the changes in fundamental nature of money.  Dr. Randall noted that although fundamental research in physics may appear to have a limited impact on society, such research has the potential for profound effects: she used the example of quantum mechanics, an obscure theory at its beginning,  which became the basis for the transistor which is essential to the development of modern computers. 

Dr. Christian discussed the concept of “Big History” which looks at the history of human beings across multiple time scales and through multiple disciplines, from the beginning of the Universe to the more traditional beginning of history with the rise of civilization. It puts this history in context by the effect of humans on the larger ecosystem and the effect of the ecosystem on humans. For example, the entire history of civilization, 5,000 years, is only 2% of the human experience. http://www.teach12.com/ttcx/CourseDescLong2.aspx?cid=8050.   Bill Gates has recommended his lectures and Dr. Christian is preparing a version for high school students funded by the Gates Foundation.  

The first evening included a great discussion guided by John Doerr and Dean Kamen (the inventor). The discussion covered a wide range of topics from the challenge of how best to encourage innovation to how to build great companies. They were able to call on audience members such as Jeff Bezos, founder and CEO of Amazon.com and Eric Schmidt, CEO of Google, Inc.  

This conference comes at a critical inflection point for the economy and technology and it provided a great framework to think about these issues. As I mentioned, the conference was excellent and I strongly recommend it to anyone interested about the future of the technology industry. Unfortunately, I had to leave on the second day for a prior engagement, a wine dinner for forty friends to launch a new wine label for my friend and favorite wine maker, Greg La Follette (more about that in my next post).  

As members of the open source industry, we know that the industry is fundamentally global. However, being global doesn’t mean being the “same”; in fact, this intellectual understanding was brought home to me very directly when I attended the first Open Source Think Tank in 2008 in Paris. We had a member of the French Parliament discuss their adoption of open source software. The sophistication about the value of open source software and its advantages was considerably higher than in the United States at that time.  The market for open source software is different in Europe and companies need to understand those differences to effectively sell into Europe. And Europe has a very different perspective about the future of open source software.

A great way to learn about these differences is by attending the Third Annual European Open Source Think Tank sponsored by Olliance Group and DLA Piper.  The European Open Source Think Tank will be held on September 28 & 29 in Paris, France (for more information, see  www.thinktankeu.olliancegroup.com). In addition, we are once again proud to partner with the Open World Forum, Europe’s leading conference shaping the future of the digital world, on September 30th and August 1st (www.openworldforum.org). As I noted in my earlier post, I am doing a significant amount of work with open source in the cloud and I am particular eager to attend the panel on open source in the cloud which has a great group of panelists. http://www.openworldforum.org/attend/agenda/open-cloud-conference. 

The Open Source Think Tank has become the event where leading global industry experts  gather and work collaboratively to chart the future of the commercial open source software industry and shape the evolution of cloud computing. Just as we did in the Napa Open Source Think Tank this spring, we will be moving to an all real-world business case format. We will use selected case studies and focus on the growing commercial maturity and complexity of open source and the evolution of cloud computing and SaaS. Just a reminder: the Think Tank is not a traditional conference, all attendees are expected to contribute and actively participate in the brainstorming and workshop format.  

This event consistently sells out so you should register early. If you have not received an invitation,  please complete the Request Invitation form at the event website. We are sorry that we may not be able to accept everyone who applies; the event is limited to senior executives who have significant open source experience.

The recent announcement about the “Openstack” product from Rackspace emphasizes the increasing importance of the cloud to the open source industry. http://blogs.the451group.com/opensource/2010/07/19/openstack-from-rackspace-nasa-shows-power-of-open-source-in-clouds/. 

For the last year, I have seen an increasing number of open source issues relating to cloud computing (for a general review of cloud contracts, see my presentation as part of a panel for PLI  http://www.pli.edu/product/mp3_detail.asp?id=103540). Many of these legal issues are new; it reminds me of the legal situation in 2004 when many fundamental legal issues in open source licenses, such as the scope of the GPL and the remedies for breach of an open source license, were unsettled.  The use of open source software in the cloud raises new and difficult legal issues such as when is use in the cloud a “distribution” (which triggers obligations to make source code available in the GPL family of licenses) and what is an “aggregate” in the cloud. We had a very lively discussion about these issues at the Stanford Law School E-Commerce conference (most of these questions deal with the GPL family of licenses so the use of the Apache license by OpenStack project will avoid some of these questions). 

The obligation to provide source code under GPLv2 is based on the “distribution” of object code of the GPL Licensed Code.  The term distribution does not have a simple or obvious meaning; “distribution is defined in Section 106(3) of the Copyright Act of 1976 (“1976 Act”) as the right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending.” The term “public” is not separately defined in the 1976 Act but is defined by reference to “publication”.  Publication is defined as follows:  “Publication is the distribution of copies or phonorecords of a work to the public by sale or other transfer of ownership, or by rental, lease, or lending.  The offering to distribute copies or phonorecords to a group of persons for purposes of further distribution, public performance, or public display, constitutes publication.  A public performance or display of a work does not of itself constitute publication.”  Publication is a complicated concept which derives from the Copyright Act of 1909 (“1909 Act”).  Under the 1909 Act, publication without copyright notice had very significant legal consequences: it could result in the loss of all rights under the 1909 Act, placing the work in the public domain.   

Ironically, cloud computing requires us to reach back to the “limited publication” doctrine from the 1909 Act to find legal guidance for how to interpret the scope of the distribution right.  The doctrine of limited publication was created by the courts under the 1909 Act in order to avoid the forfeiture of rights under the 1909 Act through inadvertent transfer of a copy of the work without the required copyright notice.  White v. Kimmel is the seminal case for the doctrine and defines a “limited distribution” as a distribution that “communicates the contents of a [manuscript] to a definitely selected group and for a limited purpose without the right of diffusion, distribution or sale.”  White v. Kimmel, 193 F.2d 744, 746 (9th Cir. 1952).  The doctrine of limited publication continues to be viable under the 1976 Act, but it has become much less important because the use of copyright notice is now optional and the failure to include it no longer puts the work into the public domain.  The House Report of the 1976 Act defines distribution to the public as “it refers to persons under no explicit or implicit restriction with respect to disclosure of its contents.”  Cloud computing may bring new life to the “limited publication” doctrine and open source lawyers may be reading a lot of 1909 Act cases (get ready, there are more than 50 of them that are relevant and thanks to our summer associate Eduardo Blanco from Northwestern University School of Law that helped me sort through them).

On June 28, 2010, the United States Supreme Court issued its long-awaited decision in Bilski v. Kappos, No. 08-964, slip op. (June 28, 2010). The Supreme Court was presented with the issue of whether the Federal Circuit’s “machine or transformation” test is the sole test for determining whether a process is patentable under 35 U.S.C. § 101, and more generally, whether business methods can be patentable. The patent application which was the subject of the case tried to patent methods for hedging risk in the field of commodities trading. The claims were classic “business method” claims: they recited steps that were performed as part of a business operation. The patent application was rejected by the Patent and Trademark Office and lost on appeal to the Court of Appeals for the Federal Circuit.

Although the Bilski decision was expected to have a dramatic effect on the patent world and, in particular, the patentability of software, the decision is surprising for how little it decided.  The Supreme Court split into a majority opinion and two concurring opinions. The majority of the Supreme Court agreed only on three points: (1) the Federal Circuit’s machine-or-transformation test is not the exclusive test for patent subject matter eligibility; (2) business methods are not categorically unpatentable; and (3) the invention at issue in Bilski is an unpatentable abstract idea.

The critical part of the decision is as follows:

Today, the Court once again declines to impose limitations on the Patent Act that are inconsistent with the Act’s text. The patent application here can be rejected under our precedents on the unpatentability of abstract ideas. The Court, therefore, need not define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, Flook, and Diehr.  

And nothing in today’s opinion should be read as endorsing interpretations of §101 that the Court of Appeals for the Federal Circuit has used in the past. See, e.g., State Street, 149 F. 3d, at 1373; AT&T Corp., 172 F. 3d, at 1357. It may be that the Court of Appeals thought it needed to make the machine-or-transformation test exclusive precisely because its case law had not adequately identified less extreme means of restricting business method patents, including (but not limited to) application of our opinions in Benson, Flook, and Diehr. In disapproving an exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit’s development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text. http://www.supremecourt.gov/opinions/09pdf/08-964.pdf

The majority opinion was not revolutionary, but more of a course correction. The Supreme Court affirmed the Federal Circuit’s judgment that the business method was not patentable. At the same time, it found that the Federal Circuit had an improperly narrow view of patent subject matter eligibility. After dismissing the Federal Circuit’s  machine or transformation test as the sole test for determining patentability of process inventions, the Supreme Court refrained from offering any alternative tests or any guidance.

The decision strongly suggests that software remains patentable, although the Supreme Court was careful to state that it was not deciding that any class of technology was patentable.  In fact, the most interesting results in the decision come from analysis of the concurring opinions.  In a very perceptive comment, the PatentlyO blog http://www.patentlyo.com/patent/2010/06/bilski-v-kappos-and-the-anti-state-street-majority.html, notes that by combining the votes of the justices in the two concurring opinions, five justices have rejected the State Street  test of useful/concrete/tangible-result.  As the PatentlyO blog notes State Street was the broadest formulation of the scope of patentability and it is rejected by five of the justices (although not formally disavowed in the majority opinion).  The other interesting result of analyzing the votes in the concurring opinions is that four justices were prepared to find that business methods are not patentable. Those four justices need only one more vote to have a majority for excluding business methods from patent protection. Both of these results suggest the way in which future cases may be decided.

The decision is likely to increase the use of eligibility of patent subject matter as a litigation defense, but will have a less clear effect on patent prosecution. Given the lack of guidance on the standards of patentability, the Patent and Trademark Office will need to find to develop its own tests.  Patent law is likely to remain uncertain in this area for some time to come. 

As I noted in my earlier post http://lawandlifesiliconvalley.com/blog/?p=468  about the recent German Supreme Court decision, Bilski should encourage software companies to include patents as an important part of their intellectual property strategy.

Patents are becoming increasingly available to cover software and software companies need to include a patent strategy as part of their larger intellectual property strategy. This growth in the protection of software was emphasized by a recent ruling in the German Supreme Court. German courts have long denied the application of patents to software. However, the court decided that a software program which automatically generates dynamic documents is a patentable invention. This decision is a major change in German law. The decision can be found at: http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=en&nr=51989&Frame=1.

My partner, Thomas Jansen, from DLA Piper’s Munich office explains the decision and its significance: in the past software patents in Germany were only considered valid under very limited circumstances. Under the new Supreme Court ruling, software will be patentable as long as the software is innovative and solves a technical problem with technical means.

In the case, the German Supreme Court decided that software is basically of a technical nature which differs from past decisions and which is significant for patentability.  The court found that the software economizes technical resources of a computer and consequently solves a technical problem. The ruling creates a presumption  that the software is patentable when it has an effect on the technical method of the operation of a computer. Nonetheless, it is still unclear which attribute of a software program is relevant to comply with this requirement. However, the ruling represents a departure from prior decisions which considered virtually every software patent as invalid because of the failure to fulfill these requirements.

The new ruling significantly simplifies the protection of software inventions by patent in the future. However, certain critical issues such as the type of technical requirements remain uncertain. However this decision emphasizes the importance of  companies including patent protection for software as part of their intellectual property strategy.

The Mozilla Foundation has started the process of revising the Mozilla Public License (“MPL”) and has published the first drafts in the process. You can read the proposed changes to definitions and licenses and comment on them. https://mpl.co-ment.com/text/KVR6Y3hsirl/view/. I am very familiar with the MPL because we used it as the base for the CDDL which I drafted with Sun’s lawyers for the open sourcing of the Solaris operating system.  

The changes are a welcome simplification to the MPL definitions and license grant. In particular, the definition of “Modifications” has been changed to delete the phrase “any addition to or deletion from the substance or structure of either the Original Code or any previous Modifications” and the definition of Modification is now based solely upon “files”. This change is very important because of the vagueness of the deleted phrase.  

Mozilla has also spent significant effort in revising the terms of the patent license to use a more traditional approach, clarifying the license grant and the definition of patent claims. However, the modifications do not appear to have modified the scope of the license grants. Most of these changes represent moves of phrases from the license grant in the current MPL to the definition of “Patent Claim” in the new version.  The patent licenses are now reciprocal, instead of having separate licenses for the Initial Developer and, then, for Contributors. In fact, the new definitions have deleted the definition of Initial Developer and now incorporates the concept in the definition of “Contributor”.   

In addition, the new draft has deleted the requirement to provide notice of any third party patent claims in a Modification or Contributor API which is known to the Contributor (this requirement in Section 3.4 of the current version of MPL):  

(a) Third Party Claims. 

If Contributor has knowledge that a license under a third party’s intellectual property rights is required to exercise the rights granted by such Contributor under Sections 2.1 or 2.2, Contributor must include a text file with the Source Code distribution titled “LEGAL” which describes the claim and the party making the claim in sufficient detail that a recipient will know whom to contact. If Contributor obtains such knowledge after the Modification is made available as described in Section 3.2, Contributor shall promptly modify the LEGAL file in all copies Contributor makes available thereafter and shall take other steps (such as notifying appropriate mailing lists or newsgroups) reasonably calculated to inform those who received the Covered Code that new knowledge has been obtained. 

(b) Contributor APIs. 

If Contributor’s Modifications include an application programming interface and Contributor has knowledge of patent licenses which are reasonably necessary to implement that API, Contributor must also include this information in the LEGAL file. 

This deletion is important because of the difficulty of complying with this obligation.  

            I look forward to reviewing the rest of the modifications. I am particularly interested in whether Mozilla will modify the “patent peace” provision in the current version of the MPL which has proved a problem for many large companies.  

8.2.  If You initiate litigation by asserting a patent infringement claim (excluding declatory judgment actions) against Initial Developer or a Contributor (the Initial Developer or Contributor against whom You file such action is referred to as “Participant”)  alleging that:

 (a)  such Participant’s Contributor Version directly or indirectly infringes any patent, then any and all rights granted by such Participant to You under Sections 2.1 and/or 2.2 of this License shall, upon 60 days notice from Participant terminate prospectively, unless if within 60 days after receipt of notice You either: (i)  agree in writing to pay Participant a mutually agreeable reasonable royalty for Your past and future use of Modifications made by such Participant, or (ii) withdraw Your litigation claim with respect to the Contributor Version against such Participant.  If within 60 days of notice, a reasonable royalty and payment arrangement are not mutually agreed upon in writing by the parties or the litigation claim is not withdrawn, the rights granted by Participant to You under Sections 2.1 and/or 2.2 automatically terminate at the expiration of the 60 day notice period specified above.

 (b)  any software, hardware, or device, other than such Participant’s Contributor Version, directly or indirectly infringes any patent, then any rights granted to You by such Participant under Sections 2.1(b) and 2.2(b) are revoked effective as of the date You first made, used, sold, distributed, or had made, Modifications made by that Participant.

 Section 8.2(b) has made many large companies reluctant to contribute to MPL licensed software because of its potential to limit the flexibility of a contributor in using its patent portfolio against products and software other than the MPL licensed software.

MPL has the opportunity to play an important role as the license of choice between pure copyleft (such as GPLv2) and pure permissive (such as BSD and Apache). However, it has not been able to fulfill that role because of the concerns raised by the ambiguity of its scope (the Modifications definition and notice obligations) and its expansive approach to “patent peace”. I hope that these revisions will make the MPL attractive to a broader set of users.

I congratulate the Mozilla Foundation for taking the initiative and hope that the result will be a more attactive alternative between GPL and Apache. I encourage the community to participate actively in the revision to make the new version of the MPL as valuable as possible! 

The results are in for the first quarter in venture investing and they are positive. After a tough 2009, the first quarter resulted in a significant increase in venture capital investing. The Dow Jones report for global venture capital investments increased by 13% over last year  http://bit.ly/1Q10Glbl. The US continues to take the lead with 65% of deals by numbers (and 67% by value). This growth is confirmed by my discussions with Silicon Valley Bank who have told me that they have seen a significant increase in the number of new bank accounts opened for startups. In fact, SVB told me that the number of new accounts in March was more than all of the accounts opened in both January and February.  This increase reflects the general optimism expressed in DLA Piper’s 2010  Technology Leaders Survey. http://www.dlapiper.com/US/news/detail.aspx?news=694c8f9d-faf5-40d2-8018-7c352437288f.

The growth in the US was roughly the same as the global average at 12%. http://bit.ly/1Q10Fin.  Venture capitalists invested $4.7 billion in 578 deals. And the shift in the relative amounts of investment among industries continues to shift. For a long time, IT represented more than 50% of deals, yet in the first quarter, IT was only 32% of the deals. The IT investments in the first quarter represented a 15% increase over the same period last year.  However,  the cleantech category increased by more than 69% in the same period. 

But I think that these comparisons in the IT sector may mask the new reality of starting software and web companies where the cost of developing a product has plunged due to the use of open source software and cloud services.  In the past, a software startup would need to buy its own servers and proprietary software development tools, representing significant capital expenditures.  Now, most of my software companies use open source and other pre-existing software to “assemble” their products and host them on the cloud. They require much less money to start; and they wait to seek traditional venture capital until they are much further along in product development and distribution.