Entangled in the Web of Things
BY FINDING NEW USES FOR DATA, THE INTERNET OF THINGS HERALDS A HOST OF CHALLENGES
Within a decade, analysts say, the “Internet of Things” will have transformed our lives. Billions of Internet-connected devices will monitor our homes, businesses, cars, and even our bodies, using the data to manage everything from appliances to heart moni- tors. Companies like Google— which recently paid $3.2 billion for smart-thermostat company Nest Labs—are already racing to build the IoT. But businesses face fundamental questions regarding the ownership of data, protecting customer privacy, liability when devices fail, and more.
Liability, of course, is a para- mount concern when connected businesses adjust their use of data for new business or consumer products, says Stephanie Sharron, a Morrison & Foerster partner and a member of the firm’s Technol- ogy Transactions Group. Using vast sets of data to find patterns and targets will leave open all sorts of possibilities for techni- cal and human mistakes. “There are questions about who should bear responsibility for inaccurate inferences or patterns that give rise to harm,” Sharron says. “Or who is responsible if a pattern comes from inaccurate data from a malfunctioning sensor.”
Then there is the question of who will manage and monitor the electrical systems needed to oper- ate such vast networks—tradition- al public utility companies, new electricity market participants,
or a combination. “Customers
The IoT will connect product developers and manufacturers in countless new ways, creating uncertainty about ownership of and rights to customer data. If a
company contracts with a big data vendor to store and process con- sumer information, for instance, each party will need to know that its partner has the legal rights to collect or share data, says Alistair Maughan, a partner in Morrison
& Foerster’s London office who is co-chair of the Technology Trans- actions Group. Then there is the question of who owns the data. “There is a whole supply chain the law is only beginning to grapple with,” Maughan says. “Manufac- turers will need to understand
the risks when there aren’t clear government standards.”
An area of major interest is how
companies will protect customer privacy when so much data is in play. Companies need to make sure that what they say about their use of data collected from connected devices is accurate, complete, and up to date. “There is no one-size- fits-all approach to data security,” says Morrison & Foerster partner
Reed Freeman Jr., who special- izes in privacy matters. “The bur- den for a company is to consider what kind of data you have and how to protect against reasonably foreseeable, unauthorized access to personal information.”
“Manufactur- ers will need to understand the risks when there aren’t clear government
standards for the use of
all this tech- nology.”
will want more choices to accom- modate the new technologies and services they get to use” in the IoT, says Robert S. Fleishman, senior of counsel for Morrison & Foerster and an expert on energy regula- tion law. “Generally it will be up
to state public utility commissions to decide who gets to provide the traffic control function and related activities for these things to oper- ate within the system for distrib- uting energy.” Some state utility commissions have already started to look at reforming their regula- tions and policies.
MOFO TECH FALL / WINTER 2014
focus BY PETER HAAPANIEMI
PAYMENTS HIT THE ROAD
WITH NEW DEVICES MAKING MOBILE PAYMENTS EASIER, BANKS ARE GETTING A RUN FOR THEIR MONEY
If you thought Google was the only organization affected by the European Court of Justice’s May decision honoring a Spanish man’s right to have
a newspaper story about him erased from its search rankings, you’d be wrong. In fact, following the court’s reasoning, other companies with European operations that republish third-party
content—including databases, content aggregators, and social media users—may need to pay attention, says Karin Retzer,
a partner with Morrison & Foerster in Brussels.
Under European data privacy laws, individuals may be able to request erasure of information not only if it was unlawful or incorrect but also if it was “inadequate, irrelevant, or no longer relevant,” “excessive,”
or not up to date. The ruling creates a quandary for organizations receiving erasure requests: erase information that readers may find interesting, or face possible legal action. The wisest course may be to assess each request on a case-by-
case basis at this point, Retzer says. When Google set up a formal channel for individuals’ requests to be “forgotten,” it got 12,000 such requests—on its first day.
the advent of mobile pay- ments is changing consumers’ lives—and reshaping the competi- tive landscape for the companies that provide payments services to merchants.
Several new companies now of- fer solutions that use smartphones with small attached card readers or qr codes to accept payments. This gives merchants an easy, inexpensive way to get into mobile payments. As a result, these companies may soon be competing with traditional payments provid- ers, such as banks, for merchants’ business. “These new non-bank providers are making the payment space a lot more competitive,” says Obrea Poindexter, a partner at Morrison & Foerster.
The competition is only getting hotter. “As soon as these non- bank providers get established
in the payments arena, they are looking for opportunities to
expand the financial services they provide,” says Poindexter. For ex- ample, some are now offering cash advance services to merchants or enabling person-to-person pay- ments, among other things.
The key is to understand that payments is just one part of a
larger experience, says David De Villiers, ceo at the Wonderwill technology firm. His company offers the Zapper solution, which lets merchants accept payments via customers’ phones. But Zap- per also provides merchants with tools for rewards, incentives,
and marketing programs, using a simple pay-for-use model. “So it’s not just about facilitating the pay- ments. It’s also about allowing the merchant to communicate with its customers to build a community of loyal customers,” he says. “Mobile payments is an enabler, and it’s really important to get it right.
But what we’re doing is using mobile commerce to give the small merchant the power of Internet marketing in the physical, bricks- and-mortar world.”
As mobile services provid- ers expand their services, they may fall under increased scru- tiny. “Mobile service providers that are merely providing the technology to facilitate mobile services should not be subject to the financial services laws,” says
Poindexter. “But regulatory agen- cies are taking a broader interest in mobile financial services—and that bears watching.”
“We’re using mobile com- merce to give the small merchant
the power of Internet marketing in the physical, bricks-and- mortar world.”
illustrations by gary taxali (l), chi birmingham (r)
A YEN FOR ISRAELI TECHNOLOGY
AGGREGATOR BY JEFF HEILMAN
A NEW BREED OF AC TIVIST IS ATTRAC TED TO TECH AND LIFE SCIENCES C OMPANIES
While Japanese companies have been investing in Israel for the past two decades, M&A activity has picked up significantly, concentrated in the science and technology (S&T) sectors.
“Japanese investors have tradi- tionally taken a low-key, under-the- radar approach with Israel, typically conducting ‘silent investments’ to keep deals from their competitors’ knowledge,” says Tokyo-based Morrison & Foerster partner Randy Steven Laxer, co-chair of the firm’s Global Corporate Department. “The trend now, however, is toward a more open and enthusiastic approach.”
Highlighted by the Japanese
e-commerce company Rakuten’s
$900 million acquisition of Israel- founded Viber Media in early 2014, there have been 94 Japanese investments in Israeli high tech, totaling $1.64 billion, since 2000.
“Both countries have highly developed S&T sectors, and each of
first there were the pirates of the 1980s and their swashbuckling raids of RJR Nabisco and other corporate booty. In the 1990s, blue chip companies legitimized the use of hostile M&A as a credible corporate strategy. Then came the mid-2000s wave of disruptive hedge fund activism. Today, sharehold- er activism is alive and well, though in shrewder forms.
“With activism now its own asset class—one that is outperforming the stock market and many other asset classes—activist hedge funds remain focused on the takeover front and M&A transactions,” asserts Morrison & Foer- ster securities partner David Lynn.
“These funds are heavily targeting technology and life sciences companies, attracted to their stock price volatil- ity, accumulated cash, and, often, weak takeover defenses,” says Morrison & Foerster partner Spencer Klein, co- chair of the firm’s Global M&A Group. “In the fast-paced, deal-driven tech market, people are more focused on quickly growing the business and look- ing to sell than on creating a robust anti-takeover position. That strategy misses the point: robust defenses can create negotiating leverage to maximize shareholder value in a potential sale.”
Whether criticizing announced deals, challenging statutory appraisal rights, or making unsolicited bids, ac- tivists can crash the M&A party in sev-
eral ways. “Public companies shouldn’t sit around waiting for an activist fund to knock on their door,” says Lynn.
“A good defensive strategy involves effective shareholder communications, awareness of activist threats, and hav- ing an advisory team at the ready.”
“Companies should structure their M&A transactions carefully to minimize activist empowerment,” adds Klein, citing Carl Icahn’s attack on the 2013 merger agreement between computer giant Dell and private equity sponsor Silver Lake Partners as an example. “The original deal included a share- holder voting structure that gave Icahn considerable leverage.”
Savvy U.S. activists are also turning their attention abroad. In Germany a le- gal “peculiarity” is attracting attention, says Dirk Besse, a corporate partner
in Morrison & Foerster’s Berlin office. “After a takeover, an acquirer holding at least 75 percent of the share capital can effect a ‘Domination and Profit-and- Loss Transfer Agreement,’ which allows it to take over the company’s business and access its cash flows,” he explains. “Intended to foster synergy between merged entities, dplta also obliges
the buyer to acquire stock held by its minority shareholders at a price set by the court. This is where activists step in, suing to challenge share value. It’s a low-risk, high-upside strategy—the
court rarely rules below the offer price.”
these, due to their respective lack of natural resources, is advancing for economic development,” says Silicon Valley-based of counsel Gal Eschet, head of Morrison & Foerster’s Israel Desk, pointing
to the recent bilateral technology cooperation agreement between the countries. “While Japan and Israel are well matched at the negotiating table, each focused on building relationships, it will be interesting to see how they balance their traditional approach to decision making, with Israelis typically moving faster than
the more deliberate Japanese approach.” JEFF HEILMAN
Israel (Tel Aviv pictured here) has a “highly developed
MOFO TECH FALL/WINTER 2014
illustration by pablo amargo
update BY GAR Y J AMES
Seeds Worth More Than Gold
PLANT BREEDERS ARE LEARNING THE VALUE OF PROTEC TING THEIR INVENTIONS
The number of utility patents granted for sexually reproducing plants rose from 497 in 2010 to 1,037 in 2013. With 581 applica- tions granted in the first half of 2014, this year’s numbers are expected to hit a new high.
“Farmers are demanding seeds that will grow in difficult, high- stress environments, providing resistance to drought, pathogens, and other threats,” says Ward.
agricultural espionage: it’s not
Department of Agriculture for
“It’s a complex “Developing these new varieties
exactly the stuff of John le Carré novels. But recently a Chinese woman was charged in a plot
to steal U.S. corn technology. Among her alleged techniques: smuggling bioengineered corn seed in boxes of microwave pop- corn packed in luggage to Beijing, and conspiring with insiders to steal genetic sequencing for the seeds.
While this case involves seeds developed by agri-giants DuPont Pioneer and Monsanto, plant breeders of all sizes are increas- ingly at risk in today’s global economy. It’s not just theft—it’s the risk of losing the benefit of the huge research investment that goes into many agricultural products.
“A pound of seeds for certain tomato varieties is worth more than a pound of gold,” says Rachel Krevans, a partner in Morrison & Foerster’s San Francisco office and chair of the firm’s IP Litigation Practice Group. “This is extremely valuable and tangible intellec- tual property, and it needs to be
In addition, breeders often pursue trademarks in conjunc- tion with patents or pvps to ensure that a brand name can only be used with permission of the owner.
“The value of a utility patent, versus pvp protection, is that the patent holder can prevent com- petitors from using a variety in breeding,” says Dr. Michael Ward, a Morrison & Foerster partner and chair of the firm’s Patent Practice Group. By contrast, pvp certificates protect the right to sell seeds but give competing breeders the right to use the pro- tected variety in breeding.
“Also, pvp protection covers just a single variety, while utility patent protection can be much broader, covering multiple variet- ies with claims to traits or claims relating to breeding methods and food product use,” he says.
represents a huge commitment of time and money, and a growing number of breeders are recogniz- ing the need to protect invest- ments by having clearly defined ip strategies.”
Many breeders remain unin- formed about these risks, notes Krevans. “It’s a complex arena, and there are several different paths for obtaining ip protection for plant varieties. In some cases, breeders will want to pursue mul- tiple paths,” she says.
Breeders have three main op- tions for protecting plant varieties in the United States:
Plant patents issued by the
U.S. Patent and Trademark Office for new and distinct, invented, or discovered asexually reproducing plants.
Utility patents issued by the uspto for seed-producing plants and plant traits. Plant variety protection (pvp) certificates issued by the U.S.
LIVE STREAMING: PROFITS AND PITFALLS
When Amazon paid nearly $1 billion for video game streaming site Twitch in late August, it hinted at the tremendous potential for sites that live stream games, concerts, sports, and more. But operators of sites in this nascent segment put themselves at risk of copyright infringement violations. For example, Twitch videos uploaded by game players could contain copyrighted sound recordings performed without the permission of the respective copyright owners. “Real-time streaming services don’t fall squarely within the ‘safe harbor’ provisions contained in the Digital Millennium Copyright Act that protect website operators from copyright suits,”
notes Rusty Weiss, chair of the Entertainment, Media, and Technology Group in the Los Angeles office of Morrison & Foerster. Until the law is settled, live-streaming site owners will need to tread carefully. For example, notes Weiss, the Section 512(c) safe harbor provides that a website operator is not liable for monetary relief for copyright infringement claims merely because it stores material “at the direction
of a user.” If a live-streaming site owner wants to increase its chance of qualifying for the Section 512(c) safe harbor, it should consider only streaming videos that the user has requested to be stored on the site’s servers for the duration of the streaming. RICHARD SINE
support BY JEFF HEILMAN
Tax Me Once
A CREATIVE — IF C OMPLEX — ROUTE TO TAX SAVINGS WHEN GOING PUBLIC
for technology and other startups, going public can be dou- bly taxing—literally.
“Traditionally, a pre-ipo com- pany is structured as a C corpora- tion, which is legally subject to two tax layers, the first assessed on income earned by the entity, and then on shareholders when selling stock or receiving divi- dends,” says Morrison & Foerster tax partner Remmelt Reigersman. “Setting up initially as a limited liability company or other entity treated as a partnership for tax purposes keeps it to one layer—as a pass-through, the entity is not taxed—except that when it comes time to go public, the partnership is generally treated as a corpora- tion and taxed accordingly.”
While this may appear un- avoidable, an innovative tech- nique known as “Up-C” leverages the llc advantage to help pre- ipo companies achieve significant tax savings and favorable deal economics while preserving con- trol for the founding partners.
“Named after upreit, an um- brella structure originated by real estate investment trusts, Up-C es- tablishes a new corporation above the historic partnership, which retains all the business assets— and the llc tax advantage—as its subsidiary,” says Anna Pinedo, a Morrison & Foerster secu-
rities partner. “The new entity is used for the ipo, downstreaming the proceeds to the llc.”
As Pinedo explains, Up-C provides upside for everyone. “To maintain control of the business,
historic partners must control the PubCo, which is achieved by dual-stock issuance,” she says. “Sold to public investors, Class A shares generate the cash and look
after the economic side of the deal, while Class B shares give voting rights to the founding partners.”
The deal includes an “In-
“Sold to public investors, Class A shares generate
the cash and look after the economic side of the deal, while Class B shares give voting rights to the found- ing partners.”
come Tax Receivable Agreement” between the partners and PubCo. “PubCo purchases partnership units from the founders using proceeds from the ipo,” Pinedo explains. “Differing from a tradi- tional stock purchase, this method creates a step-up in the tax basis, which permits the partners and PubCo to take significant deprecia- tion and amortization deductions over time. PubCo then pays the founders the majority, typically 85 percent, of the federal and state tax benefits it has gained.”
Complicated, yes, but this translates into some very attrac- tive economics. “Say the tax basis step-up is valued at $300 million, with an annual amortization of
$20 million over 15 years,” says Reigersman. “Assuming a com- bined federal and state tax rate of 40 percent, that saves PubCo $8 million a year while paying the historic partners $6.8 million an- nually—$102 million over time.”
Up-C is not for everyone. “From an administrative and
compliance perspective, this structure is far more involved than
going public via the traditional route,”
Reigersman says. “But for larger compa- nies, it can be very effective.”
TWO FDA GUIDELINES HELP
LIFE SCIENCES C OMPANIES SOLVE SOCIAL MEDIA
Social media presents new chal- lenges for life sciences companies. Companies that post about their products on space-constrained social media platforms such as Twitter or Facebook don’t have the luxury of a full page or a long voiceover listing risks or side effects. And it’s unclear how to respond to misleading information about products posted online by third parties. In June, the Food and Drug Administration produced two much-anticipated draft documents that provide some guidance in each case.
THE “TWITTER GUIDANCE”
“Internet/Social Media Platforms with Character Space Limitations— Presenting Risk and Benefit Information for Prescription Drugs and Medical Devices” (found
at http://1.usa.gov/1kGYdgK) specifies that a brand should, within the post:
3 Include the brand and established name, dosage form, and ingredient information
[...CAN LOWER THE ABILITY OF YOUR IM-] [MUNE SYSTEM TO FIGHT INFECTIONS.] [SOME PEOPLE HAVE SERIOUS INFEC-] [TIONS WHILE TAKING THIS MEDICATION,] [INCLUDING TUBERCULOSIS AND INFEC-] [TIONS CAUSED BY BACTERIA, FUNGI, OR] [VIRUSES THAT CAN SPREAD THROUGH-] [OUT THE BODY. SOME PEOPLE HAVE DIED] [FROM THESE INFECTIONS. THIS MEDICA-] [TION MAY INCREASE YOUR RISK FOR CER-] [TAIN CANCERS BY CHANGING THE WAY] [YOUR IMMUNE SYSTEM WORKS. LYM-] [PHOMA AND OTHER CANCERS, INCLUD-] [ING SKIN CANCERS, HAVE HAPPENED] [IN PATIENTS TAKING THIS MEDICATION.]
MOFO TECH FALL/WINTER 2014
illustration by greg clarke
3 Accompany benefit with risk information
3 Provide a link to a page devoted “exclusively” to risk information.
If both benefit and risk information can’t be included in the limited space, the company should consider using a different platform, the FDA advises. “The Twitter Guidance provides a fictional example to show that
it’s not impossible to produce an acceptable tweet. But it is very difficult,” says Erin M. Bosman, chair of the Product Liability Practice Group at Morrison & Foerster. Companies that go the Twitter route may want to focus on products with only a few risks or risks that are easy to understand, she says.
CORRECTING THIRD-PARTY MISINFORMATION
support BY JENNIFER PILLA TAYLOR
Secrets in the Spotlight C OMPANIES MAY GET A NEW WEAPON IN THE FIGHT AGAINST EC ONOMIC ESPIONAGE
This guidance, called “Internet/ Social Media Platforms: Correcting Independent Third-Party Misinformation About Prescription Drugs and Medical Devices,”
can be found at http://1.usa. gov/1kHcfii.
“Companies can breathe a sigh of relief with this guidance because it says companies are not obliged to correct third-party information,”
Bosman says. “This reduces the need to monitor and mine
massive quantities of Internet data about their products.”
The FDA suggests guidelines for voluntary correction of third-party misinformation, such as posting the correction in the same area or forum where the misinformation is found, when possible. Bosman suggests that companies should have “a standard policy about the type of information to correct.
For example, misinformation that presents serious health risks should be a higher priority than correcting more innocuous misinformation.” She also recommends formulating a
standard response for correcting common misinformation in order to ensure accuracy and consistency.
JENNIFER GOFORTH GREGORY
efforts to protect intellectual property from global threats gained momentum in Washington this summer with the introduction of a pair of bills that would create a federal civil cause of action for trade secret theft.
Currently, intellectual property owners that want to file suit for trade secret theft can only do so in state court. Under the Senate’s Defend Trade Secrets Act and the House’s Trade Secrets Protection Act, plaintiffs could sue in federal court, where it can be easier to reach defendants that have fled to another state or country.
Both bills, which are similar in scope, have Democratic and Republican sponsors, who cited federal estimates that U.S. businesses lose $300 billion a year as a result of trade secret theft.
“Federal authorities have been talking about this problem for the last several years,” says Morrison & Foerster partner Daniel Westman. “This to me is a sign of determination by Congress to do something about it.”
The proposals come less than two years after Congress passed legislation expanding both the scope and available criminal penalties under the Economic Espionage Act, which makes trade secret theft a federal crime. Since then, the U.S. Department of Justice has got- ten the world’s attention with a string of corporate espionage indictments, capped by the sentencing this summer of a chemical engineer convicted of sell-
ing DuPont trade secrets to the Chinese government, says Morrison & Foerster partner Eugene Illovsky, a former as- sistant U.S. attorney.
Stephen Freccero, also a Morrison & Foerster partner and former assistant
U.S. attorney, says he sees the interna- tional enforcement push gaining steam, with federal authorities seeking alli- ances with authorities overseas. “It’s a strategy they’ve used with great success in antitrust and anti-money laundering enforcement,” he says.
But with the evidentiary bar high for bringing a criminal charge and the problem so widespread, authori- ties tend to be highly selective about
the cases they take on, says Westman. That’s why creating a federal civil cause of action is important. “The more op- tions you have, the better,” he says.
Even with increased protections, businesses with valuable trade secrets must do more to just prevent theft. “One of the best tools is encourag-
ing employees to understand that not everyone is well intentioned by training them about threats,” says Westman.
While most employees are well-in- tentioned, perpetrators are occasionally aided by sympathetic insiders. “Perhaps they are skeptical of authority or of big business, and they might be persuaded to turn a blind eye to wrongdoing,” says Westman. “For those people, it’s impor- tant for companies to convey that they are deadly serious about this.”
illustration by kevin pope 07
C O VER S T OR Y
The Comıng of the
amazon isn’t the only business that would love to get its hands on an “octocopter .” by richard sine
Don’t look now—hobbyists may already be flying drones in the skies near you, and commercial uses are emerging. The New York Times
reported in June that drones have already been put to work gathering news, checking crops for farmers, taking dramatic house photos for real estate agents, even delivering drinks to poolside hotel patrons.
Last December, Amazon.com’s Jeff Bezos appeared on 60 Minutes
says Mathur, who is a managing direc- tor in Accenture’s mobility services practice. Or it can visually inspect an aircraft much faster than a human— and then store every detail of the inspection for later review.
But the excitement has been tempered by some scary incidents, like one last
March, when a drone nearly collided with a passenger jet over Tallahassee, Florida.
to show off drones that could deliver packages to most Americans in just 30 minutes. He said “octo-
copters” the size of today’s model aircraft could be delivering packages to your doorstep in four to five years. “I know this looks like sci- ence fiction, but it’s not,” he told CBS’s Charlie Rose.
But all of this is just the tip of the iceberg. Cheaper, greener, nimbler, and potentially safer than aircraft or automo-
biles, tomorrow’s go-anywhere, see-
everything drones may
soon busy themselves conduct- ing market research, working on
security patrols, supervising workers, inspecting damaged infrastructure, monitoring wildfires and tornadoes, carrying relief supplies to disaster areas, or any other job that is “dirty, dangerous, dull, or difficult,” accord- ing to Michael Toscano, president
of the Association for Unmanned Vehicle Systems International, a trade group.
Toscano estimates that drones could become an $82 billion, 100,000-job industry by 2025. The Federal Aviation Administration, for its part, estimates that as many as 7,500 small commercial drones could take to the air by 2018. But there’s
a hitch: The faa has declared all commercial drone applications illegal without a special permit. At present,
the agency has approved only a hand- ful of these permits.
In the U.S., drones have flown straight into a wall of worry about safety and privacy. Many
Americans still know them only as vehicles that spy on (and bomb) terrorists in the Middle East. It’s not too early for any business to investi- gate how to put them to use.
But that investigation must be tempered by a realistic assessment of what will
be legal, safe, and acceptable to the
Better, Faster, Stronger Search for “drones” online, and you’ll find a variety
of slick, camera-equipped
quadricopters selling for as little as $300. Ankur Mathur of
the technology and consulting services firm Accenture says interest in com- mercial uses has been fueled by three trends:
3 The rapidly declining cost of the drones and their sensors
3 Their increasing capacity to fly autonomously
3 Their potential to improve on the human eye
Using special cameras, a drone could measure the topology of a farmer’s land or sense distressed vegetation,
The incident high- lights a problem, notes Morrison & Foerster partner Bill O’Connor:
There are no
regulations designed to prevent close calls like this one. In a 2007 policy statement, the faa prohibited drones from flying in the national airspace without permission from the FAA. But the lack of specific regulations hinders the faa’s ability to enforce the prohibition. The agency’s first at- tempt to fine an individual for com-
mercial drone use was reversed in March by an administra- tive law judge, who said the faa lacked the regula- tory authority to issue the
$10,000 penalty. The faa has appealed the decision.
Recognizing the eco- nomic potential for safe
commercial drone use, Con- gress, in its 2012 faa Modernization and Reform Act, ordered the faa to publish regulations for small drones (under 55 pounds) by this past August and for all drones by September 2015. But the agency is behind schedule. As MoFo Tech went to press, the faa had not proposed a rule for any so-called Unmanned Aerial System—and the proposal itself would merely kick off a public review process that could take 18 months.
The delay increases the risk that the U.S. will lose businesses that design, manufacture, or utilize drones
MOFO TECH FALL / WINTER 2014
i l lust r at ion by rob wilson
to countries or regions—like Japan or the European Union—with a better- developed regulatory environment, says O’Connor, who heads the firm’s UAS/Drones Working Group. At the same time, the lack of clarity around regulations and enforcement embold- ens drone users to take foolish risks.
Not Over My Backyard
But even if the faa approved commer- cial drone use tomorrow, drone opera- tors would confront public fears of being stalked, harassed, or spied on by drones. Nearly every state has consid- ered some form of legislation restrict- ing drone use, says Nathan Taylor, of counsel at Morrison & Foerster, and 16 states have approved
laws. Most of the state laws focus on law enforcement— a typical law prevents law enforcement use of a drone to collect information about an individual without a warrant—but seven have broader privacy-related restrictions. Idaho, for example, forbids
using a drone to intentionally con- duct surveillance on a
person or piece of private property.
The fears are not entirely unwar- ranted. Drones could surreptitiously watch (and listen to) individuals late
at night or from long distances. They could also collect, store, and
transmit massive amounts of data. “It’s important to keep in mind not only the new drone-specific laws, but more gen- eral principles of tort and criminal law that could be extended to drones,” says Taylor, of Morrison & Foerster’s Privacy and Data Security Group. “Courts could apply principles such as trespass, nuisance, ‘intrusion upon seclusion,’ and ‘public disclosure of private facts’ to limit the use of drones.”
In late July, news reports said the White House is planning to order the development of privacy guidelines for commercial drones. The National Telecommunications and Informa-
tion Administration would develop a set of voluntary best practices in consultation with companies and consum- er groups. The guidelines, however, would not super- sede state law, Taylor says.
Meanwhile, federal regulators will also have to grapple with data se-
curity issues around drones. Last Novem- ber, two aerospace
engineers warned in the pages of Scientific American that “drones’ security flaws allow them to be readily hijacked with simple technologies.”
Look for Low-Risk Uses
It may be late 2015—or later—before the faa approves regulations on drone use in the domestic airspace. The FAA’s first set of regulations “will al- low for commercial operations in low- risk, controlled environments,” the agency says. In the meantime, several companies have filed for regulatory exemptions. They include film produc- tion companies, which see drones as
a cheaper, safer alternative to filming with helicopters; farm- ers, who use them to survey or spray crops; and Amazon. Six of the film companies’ exemp- tion requests were granted on September 25. Companies in- volved in pipeline and power-
line inspection and oil-and-gas flue stack inspection are also reported to be considering filing for exemptions.
Now that the FAA has granted the exemptions for film, it is likely that other companies will follow suit. The faa is also likely to issue exemptions for drone operations in areas that are sparsely populated or owned by the drone operator, O’Connor adds. It may also prefer that drones stay within the pilot’s line of sight, Toscano says.
The bottom line? Amazon’s dream of self-navigating drones delivering books to New York City penthouses may be years away. But a wide variety of other commercial uses may be just around the corner.
odeon & uci cinemas group
IT’S (NOT) ONLY A MOVIE
by advancing film digitization, consolidating
content delivery, and adding mobile capabilities,
sam sahana helps odeon’s theaters drive sales
and fill seats by renée smith
First, he brought mobile boarding passes to airports. Now, Sam Sahana is helping theaters make the most of the mobile and digital experience. From mobile apps to speed the sales of tickets and pop- corn to booking a theater via social media just for friends, Sahana understands the value of bringing a mobile device to the theater even if you are expected to turn it off once the movie begins. He also
“The MovieTransit system also allows Odeon to transport all the different kinds of content—theatrical content or movies, trailers, advertisements, and live content such as sports or op- era—across one technology platform,” Sahana says.
Most important, the technology enables Odeon to offer customers some unique opportunities, such as booking a theater for a group to see a film that is out of theaters but not yet available at home, or filling a theater with your child’s friends for a big- screen viewing of The Wizard of Oz. “Unique Digital has created a content
understands that the new economic frontier in the film exhibition busi- ness is e-commerce.
“This time in the industry is criti- cal,” says Sahana, currently cto of Odeon & uci Cinemas Group. “I’ve been very fortunate because I led transformation with the airlines launching their portals. That was the beginning of my e-commerce career, and I have a long history of doing this. I’m fortunate to have the right team and industry climate so that
I can replicate the experience with Odeon.”
What does that mean, exactly, for movie exhibitors like Odeon, the number one cinema chain in the world outside of the Americas?
For starters, it means Odeon’s leap into the world of film digitiza- tion in 2011—a leap that took it
far afield of its competitors, about two years before Sahana came on board—is being taken to the next level. “Until 2009, pretty much every movie you went to see, aside from imax, was an analog print film played on a projector, a technology that’s been around for 100 years,” says Chris Coulter, a partner in Mor- rison & Foerster’s London office and a member of the firm’s Technology
While the moviemaking commu- nity (distributors) was eager to save that cost by getting theaters on a digital platform, the exhibition com- munity (theaters) was looking at a huge technology investment to show a film sent via satellite or shipped on a hard drive. Odeon, with assistance from Coulter, came up with an inno- vative plan to finance the conversion. “The structure involved the estab- lishment of a tax-efficient vehicle backed by private investors, Digital Deployment Associates, that acquired and deployed the digital platform for Odeon,” Coulter says.
From this digital platform, Odeon has been able to deploy more 3-D technology and live sports and to try out more new content than other cinemas. And last year, Sahana— whose background includes stints in private equity and as cio of a global airline trade body—came on board to expand the platform. Sahana’s initia- tives have included Odeon’s deal last spring consolidating electronic digital content delivery via broadband to a single technology platform provided by MovieTransit from Unique Digital.
catalog and booking system enabling exhibitors to allow consumers to digi- tally book content on demand,” says Sahana. Good for the customer, and good for the theater, which may fill no more than 20 percent of its seats on an ordinary day.
Sahana is translating transaction data into customer insights that will allow Odeon to deliver increasingly personalized offers, driving up sales to satisfied customers. In a business with high fixed costs, the frequency with which customers fill seats mat- ters a great deal. But personalization comes with legal issues. “As customer data increases in importance, under- standing privacy and protecting data become essential,” Coulter says.
Odeon is also the first chain in Europe to launch free consumer Wi- Fi and is investigating new mobile and online payment and self-service tools such as PayPal on the Conti- nent. As Odeon develops customized enhancements to its platform, issues emerge involving ownership of apps and interfaces, providing more legal and business challenges in this wild digital Western.
Transactions and Global Sourcing groups. “The big studios were very keen for that to change because shipping a copy of the film costs serious dollars.”
MOFO TECH FALL / WINTER 2014
“Until 2009, pretty much every movie you went to see,
aside from IMAX, was an analog print film played on a projector, a technology that’s been around for 100 years.”
photogr a ph by a ndy smith
company: odeon & uci cinemas group
us $1.14 billion
what it does:
operator sam sahana, cto of odeon, takes in a show in london.
Mad, Mad, Mad,
early determinations of fair,
reasonable, and non-discrimina-
tory license payments have
been anything but consistent
by jennifer pilla taylor
When an invention claimed in a patent is
essential to complying with a technical operat-
ing standard—say, for a device to connect to
Wi-Fi or a 3G wireless network—it is considered
a Standard Essential Patent, or sep.
Under the rules of many standard-setting organiza- tions, the holders of such patents must agree to license
q MICROSOFT V. MOTOROLA
11 Wi-Fi patents / Western District, Washington State,
Royalty requested: 2.25% of Xbox with Wi-Fi price (estimated $4 billion/year)
Royalty awarded: 3.471 cents per Xbox with Wi-Fi (estimated $1.8 million/year)
In the first FRAND determination by a U.S. court, a judge relied heavily on evidence of royalty rates set by relevant patent
pools. The ruling was significantly less than Motorola’s originally requested royalty for its Wi-Fi standard essential patents.
q IN RE INNOVATIO LITIGATION
19 Wi-Fi patents / Northern District, Illinois, Oct. 2013
Royalty requested: $16.17 per tablet device
Royalty awarded: 9.56 cents per Wi-Fi chip
Acknowledging that the rate set was nearly three times that set in the Microsoft v. Motorola case, the judge explained that the
patents at issue here were of greater importance to the standard. Royalty was calculated per chip, rather than per end product.
q ERICSSON V. D-LINK
3 Wi-Fi patents / Eastern District, Texas, Aug. 2013
Royalty requested: 50 cents per Wi-Fi chip, for entire portfolio of patents
Royalty awarded: 15 cents per Wi-Fi chip, for the 3 infringed patents
FRAND rate was set by a jury without explanation for how various factors were weighed.
q REALTEK V. LSI
2 Wi-Fi patents / Northern District, California, Feb. 2014
them to others at a rate that’s considered frand: fair,
reasonable, and non-discriminatory.
But when the parties can’t agree on what’s frand, the dispute can end up in court.
The past two years have brought the first few frand determinations by U.S. courts, and the results have hardly been uniform. Key factors in determining a frand royalty are the importance of the patent or pat- ents to the operating standard as well as the standard’s importance to the product at issue. Courts have also taken into account the royalties paid by licensees of patent pools that include comparable essential patents. But judges and juries haven’t been consistent in wheth- er they calculate the royalty as a percentage of the price of the end product (i.e., a smartphone or Xbox) or as the smallest salable unit (i.e., a Wi-Fi chip).
Morrison & Foerster partner Jason Bartlett believes the decisions have important implications for both sep holders and would-be licensees, which need to think strategically about which forum would be most advan- tageous for a frand determination.
“I think people look at these royalty determinations and think, ‘Well, those all seem pretty small,’ but that’s not really the right way to look at it,” says Bartlett.
“It may not sound like much, but even the difference between 3 cents and 15 cents is massive.”
Royalty requested: 0.29% per Wi-Fi chip
Royalty awarded: 0.19% per Wi-Fi chip
(about 0.19 to 0.33 cents per chip based on a per-chip price of $1 to $1.74)
Another jury-set, patentee-friendly FRAND rate, which, because Realtek makes Wi-Fi chips, is based on a percentage of price rather than a per-chip royalty.
q HUAWEI V. INTERDIGITAL
China, Apr. 2013
Royalty requested: Not reported
Royalty awarded: 0.019% of each product
In this dispute over InterDigital’s 2G, 3G, and 4G Chinese standard essential patents, a Chinese court determined the FRAND rate as a percentage of the sales price of Huawei’s end product.
q CSIRO V. CISCO
Eastern District, Texas, Aug. 2014
Royalty requested: $1.35 to $2.25, varying on volume
Royalty awarded: $0.65 to $1.90, varying primarily on volume
The CSIRO royalty tops out at a rate higher than the In re Innovatio court said would be FRAND for all Wi-Fi essential patents put together (estimated to be around 3,000 in all).
“You’ve got a situation where a court
Illinois is more similar to one in Japan than
it is to one in
MICROSOFT V. MOTOROLA
per Xbox with Wi-Fi
IN RE INNOVATIO LITIGATION
per Wi-Fi chip
REALTEK V. LSI
per Wi-Fi chip
ERICSSON V. D-LINK
per Wi-Fi chip, for the 3 infringed patents
HUAWEI V. INTERDIGITAL
of each product
CSIRO V. CISCO
$0.65 – $1.90
varying primarily on volume
i n fogr a ph ic by cata logtree 13
evan burfield & donna harris
entrepreneurs break new ground at a startup incubator in the u .s . capital by erin brereton
Tech entrepreneurs talk so much about “making the world a better place” that the phrase has been satirized on the hbo series Silicon Valley. That didn’t deter Evan Burfield and Donna Harris from dubbing their Washington, D.C.-based business incubator 1776, giving it the motto “Where Revolu- tions Begin” and dedicating it to “reinventing our lives as
harris: The objec- tive was to get into tech communities in major cities around the world, spend time mentoring companies tackling problems in innovative ways, and find the most promis- ing ones. We selected one winner in each of four industries—four winners per city in 16
They’re reading the same books, using the same language, tools, and technology—it
is emerging truly as a uniform global
ecosystem. Ideas and best practices are be- ing shared; no one is holding on to infor- mation in a propri- etary way. Entrepre- neurs in each city are
citizens.” In this Q&A, Burfield and Harris discuss how startups use Washington as a base as they tackle some of the country’s (and the world’s) biggest challenges.
HOW HAS 1776 EVOLVED SINCE ITS START?
burfield: The point of 1776 has always been about creating a community where the most promising startups could work with institu- tional partners, mentors, investors, and others to help develop those companies. Startups think they need introductions to investors most. What they actually need most often is to be connected with people who deeply under- stand the structure of these industries—what products and services they need, what pricing models work best, and how to really make a company viable.
harris: Capital follows really good ideas, and startups frequently don’t find funding because they lack solid mentoring.
ARE YOUR STARTUPS CENTERED ON ANY SPECIFIC INDUSTRIES?
burfield: We see the most action in educa- tion, health care, energy, and city operations optimization. If you look at the population of the world that will be living in cities in 20 to 30 years, it opens up tremendous opportuni- ties in the kinds of sectors that may have once scared venture capitalists away because cities are highly regulated and very complex.
WHAT DOES D.C. OFFER TECH STARTUPS?
harris: We’re in the nation’s capital—one of the most powerful cities in the world. People dedicate time here to connecting with each other—that’s the currency of the city. With the
tions here, there’s incredible expertise that is a stone’s throw away from our facility that may never really have thought about engaging with start- ups before. burfield: A great example would be
the call we got from the White House saying the president would like to come spend an hour and a half meeting with our startups the day before July 4. Presi- dent Obama asked a
lot of questions about companies’ business plans and how they’d been impacted by the economy. Building an incubator four blocks from the White House makes a visit like that a lot more likely.
YOU HELD AN INTER- NATIONAL CHALLENGE CUP BUSINESS COMPE- TITION IN 2013. WHAT WAS ITS CENTRAL GOAL?
cities—and ended up with 64 really com- pelling companies. The competition al- lowed us to raise the visibility of 1776 and show that there are startups all over the world thinking about these challenges in
a great way, tackling what we’d tradition- ally say are govern- ment’s problems to solve.
HOW WOULD YOU DESCRIBE THE CURRENT GLOBAL STARTUP MARKET?
harris: If you look across the world, there are emerging ecosystems literally on every continent— it’s not just a U.S. phenomenon. We’ve been to Tel Aviv, Berlin, Cape Town, and everywhere in between in the past six months, and the communities look uncannily similar.
focusing on making their own communi- ties vibrant, and once they grow their local companies, they can connect them to a huge global network. That’s how startups are going to grow in the future.
As a founding sponsor of 1776, Morrison & Foerster has provided strategic support to member startups since the campus first opened its doors. Attorneys across a myriad of practices hold office hours, moderate Q&A discussions, and deliver salient presentations
in an effort to help companies grow from a solid business and legal foundation. “We do our best to be good community members, in terms of mentoring
and supporting the next generation of entrepre- neurs,” says Tom Knox, a partner in Morrison
& Foerster’s Corporate Department.
executive, legislative, and judicial branches of the federal government, the local D.C. govern- ment, universities, think tanks, and corpora-
“Capital follows really good ideas, and startups frequently
don’t find funding because they lack solid mentoring.”
photogr a ph by scott suchm a n
evan burfield and donna harris in the washington, d.c., office of 1776.
photogr a ph by john doe
Re boo t
SHARE AND SHARE ALIKE
how the patent non-assertion pledge can be a savvy business strategy by jennifer pilla taylor
Tesla’s recent pledge not to sue those who use its patent-protected technology is evidence of the broadening popularity of patent non- assertion strategies outside the formal standard-setting process.
But those who would rely on such pledges still need to read the fine print. ¶ It was nearly a decade ago that ibm announced it would
allow free access to a portfolio of more than 500 patents for those
using them to develop or distrib- ute certain open-source software.
Since then, a number of other tech companies have issued their own pat- ent non-assertion pledges. In 2012, Twitter promised that it would not wield its patents in litigation. Google now lists dozens of patents it won’t enforce unless it is sued first.
Electric carmaker Tesla’s pledge is notable in that it moved the strategy beyond the information and commu- nications sector and into the manu- facturing field. It’s a trend that’s like- ly to spread, says William Schwartz, a
reasonable, and non-discriminatory (frand) licensing terms.
As the database shows, each pledge comes with its own set of caveats. For example, Tesla pledges that it will not “initiate” patent liti- gation against anyone who, “in good faith, wants to use” Tesla technology, prompting many to wonder what uses would be considered in “good faith.”
The pledge did not explicitly include an exception—included in many patent non-assertion pledges— stating that Tesla may still assert its patents if it is on the defensive end of an infringement lawsuit, though
Schwartz says it’s safe to assume that Tesla reserves that right. He notes the word “initiate” may have been care- fully chosen with this in mind.
One of the biggest unknowns is whether a future owner of a patent would have to abide by a non-asser- tion pledge if a pledged patent were sold or transferred by the pledge maker, especially if (as with Tesla) the pledge was made unilaterally and informally. Because these pledg-
Morrison & Foerster partner focused on technology transactions. “As long as there are people who see patents as an impediment to growth because they are too inflexible, this strategy will continue to be used as a means to take the hard edges off,” he says.
While these pledges may help spur innovation through the shar- ing of technology, it’s important to remember that they’re not altruistic, Schwartz says. By encouraging others to innovate using its technology, a company is often hoping to sell more
products or services by expanding the market. For example, for Tesla, a lack of conveniently located charging sta- tions has been a major barrier to get-
ting more people to buy electric cars. If others also make and sell electric cars, the thinking goes, more charging stations would be built.
The patent non-assertion strategy has become so widespread, it has
its own database (at www.pijip.org/ non-sdo-patent-commitments/). Launched by the Washington Col- lege of Law at American University earlier this year, it links to dozens of pledges by patent holders outside the formal standard-setting process to allow others to use their technology, either free of charge or under fair,
es are a relatively new phenomenon, it’s unknown how that and other potential legal issues would be resolved. “You really have to think hard before relying too much on one of these pledges,” says Schwartz. “There are still a lot of ‘what-ifs’ that haven’t been answered.” But
he expresses admiration for the boldness of Tesla’s move. “Patent non-assertion commitments can be very complex,” he explains, “and Tesla’s probably would have had far less impact if it were complicated by a lot of legal detail.”
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