William A. Tanenbaum [FNa1]

Copyright (c) 1996 by William A. Tanenbaum. All rights reserved.

SUMMARY OF CONENTS

SYNOPSIS *

I. Introduction *

II. The Subjects Intellectual Property Due Diligence Should Address *

III. Due Diligence Common to Patents and Copyrights *

A. Administration of Due Diligence Investigations
B. The Due Diligence Letter
C. Ownership
D. Security Interests

IV. Patent Due Diligence *

A. Maintenance Fees
B. Determination of the Remaining Patent Term
C. Determination of Whether the Contributing Party's Patents Cover the Contributed
Property
D. Determination of the Validity of the Patent
E. Determination of Whether the Contributed Property Infringes a Third Party's Patent
Rights
F. Special Patent Litigation Issues
G. Competitors' Pending Applications and the Use of Foreign Patent Applications

V. Trade Secret Due Diligence *

VI. Copyright Due Diligence *

A. Computer Associates v. Altai
B. The Impact of Altai on Copyright Due Diligence
C. Determining Whether the Venture Has Obtained All of the Necessary Copyright Rights From All of the Necessary Parties

VII. How Software Created for an Online Work Can be Created as a Copyright Work Made for Hire When the Same Software, Standing Alone, Could Not Qualify *

VIII. Special Internet Web Site Development Issues *

A. Web Site Development Agreements
B. Pre-Existing Rights
C. Hypertext Links
D. Newly Created Intellectual Property
E. European Privacy and Database Protection
F. Future Technology Clauses
G. Public Domain Works
H. Internet Domain Names

IX. Determination of Whether Patents and Copyrights Are Unenforceable Because of 'Misuse' in Licensing Practices *

X. International Conflict of Laws for Internet and Online Copyrighted Works *

A. Introduction to International Copyright Conflict of Laws Analysis
B. Illustrative Scenarios for International Conflict of Law Analysis
C. Illustrative Court Decisions
D. Copyright Classification of Works
E. Summary

Conclusion *

SYNOPSIS

The development of Internet Web sites and the increased formation of strategic alliances, joint ventures, partnerships and similar enterprises for Internet and online transactions has placed great importance on conducting proper intellectual property due diligence for these enterprises. This applies both to the "content" (the text, images, databases and so forth) and "technology" (browsers and other computer software) of online publications, products and services, and to any multimedia works which may be incorporated in them.
If a party who contributes content or technology does not own or have an adequate license to the intellectual property, then the joint venture and its other members may face liability for infringement. An injunction may issue prohibiting the offering of an online product or service or the operation of a Web site because of an infirmity in the intellectual property rights in a small part of the product, service or site.
Sophisticated intellectual property due diligence is required because: (1) online publications and services are typically covered by a combination of patent, copyright, trade secret and trademark law; (2) while first generation online due diligence often focused on copyright rights in pre-existing "content," the current generation of Internet services, products and Web sites involve software (and to some extent hardware) technology rights, which in turn implicates patent rights, and it should be noted that merely because a product is patented does not mean that it cannot infringe third party patents; (3) recent software copyright infringement cases (for example, Computer Associates v. Altai and Lotus Development v. Borland) have reduced the scope of copyright protection for computer programs, which directly impacts how copyright registrations should be filed, and new registration practices require new types of copyright due diligence investigations; (4) recent copyright work made for hire cases have made due diligence for copyright ownership increasingly important; and (5) intellectual property rights are territorial, and therefore due diligence must be international in scope, and moral rights and similar types of rights are subject to very different rules overseas and must be carefully investigated because of the importance of international markets. The article reviews current requirements for patent, trade secret and copyright due diligence for Web sites and online products and software. It also discusses how software created for online works (and multimedia works) can be created as a copyright work made for hire when the same software, standing alone, could not qualify for work made for hire status. In addition, it outlines the special due diligence issues which arise in developing an Internet Web site. Finally, the article addresses international conflict of law issues that arise out of the cross-border use of copyrighted online products and services.

I. Introduction

This article addresses intellectual due diligence for online products and services and Internet Web site development. It also highlights how international copyright conflict of laws issues which arise in cross-border online transactions. In addition, the article also discusses how software and other work created for an online product can be created as a work made for hire when the same work, standing alone, could not be.
An important trend in the Internet and online industries is the formation of strategic alliances, joint ventures, partnerships and other similar forms of business enterprises whereby different companies join together to develop technology and create and market publications, products and services. (For convenience, these enterprises will be referred to as "alliances" or "ventures," and companies which are members of the alliances will be referred to as "members" or "venture parties.") Online products and services can be said to have two components: (1) "content," which includes text, visual images (both moving and still), sound, database information, logos, cartoon characters and the like, and (2) "technology," which includes, browsers, encryption, search and retrieval and other types of software, and, in some cases, hardware and combination hardware and software components and security features. One characteristic of these alliances -- which is often an important strategic advantage -- is that each venture party contributes valuable technology or content to the enterprise and its products or services (referred to in this article as "contributed property").
However, if the venture party does not own or have the right to grant the alliance the right to exploit the contributed property in the intended fashion, then the alliance and each of its members can face liability for intellectual property infringement. Indeed, an injunction may issue prohibiting the offering of online publications and services because of an infirmity in the intellectual property pedigree of one small part of the product or service or the underlying technology.
For this reason, the venture and each of its members should conduct intellectual property due diligence in connection with the formation of the alliance, and due diligence should be conducted as new content and technology is contributed to the enterprise. The venture should be sure that it is receiving not only the technological and commercial benefits of the contributed property, but that the intellectual property rights therein are valid, and that the venture is receiving the property free from infringement liability to third parties. Each venture party's rights and share of profits in the alliance can depend upon the strength of the intellectual property in the property it contributes to the venture, and proper due diligence can determine whether the contribution is worth the value which has been placed upon it. Moreover, in addition to the alliance and venture parties, investors in the alliance (or in individual venture parties) also may wish to conduct intellectual property due diligence in order to assess the value of the alliance's technology and products, the right of the alliance to commercially exploit the same, and the nature of the intellectual property risks being assumed by the venture. Strategic alliances often involve cross-licenses, particularly regarding patents, and patent licenses raise special issues.
Sophisticated intellectual property due diligence is important in online transactions for several reasons. First, online products and services are typically subject to -- and best protected by -- overlapping forms of intellectual property rights. For example, different aspects of online works can be simultaneously protected by copyright, utility (i.e., "regular") patents, design patents, trademarks, service marks, know-how and trade secrets. Second, first generation online due diligence often focused on obtaining copyright licenses ("permissions") for pre-existing "content" works from third parties. However, current and future generations of online products and services frequently require the acquisition of "technology" rights, and this increasingly implicates patent rights, as illustrated by the number of recently issued software patents. It is important to note that merely because a product or process is patented does not mean it cannot infringe other patents. In fact, patented technologies can and often do infringe other patents. A patent does not grant the patentee the right to practice his invention. Rather it grants the patentee the right to exclude others from making, using or selling the patented subject matter. 35 U.S.C. ss 154 and 271.
Third is the impact of recent developments in software copyright litigation. For example, the Second Circuit's decision in Computer Associates v. Altai, 982 F.2d 693 (2d Cir. 1993) and the First Circuit's decision in Lotus Development Corp. v. Borland International, Inc., 49 F.3d 807 (1st Cir. 1995), affirmed by an equally divided Court, 116 S.Ct. 804 (Jan. 1996) (per curiam) reduced the scope of copyright protection for software by holding that certain aspects of computer programs are not copyrightable subject matter. This has a direct impact on how the copyright in computer programs should be registered, which in turn requires an increased level of sophistication in the copyright due diligence that must be exercised in evaluating copyright registrations and related copyright prosecution practices. Altai, Lotus and other cases reflect two emerging trends in software copyright litigation: the emergence of a de facto separate body of copyright law for computer software, and the increased use of patent law concepts in software copyright disputes.
Fourth, and related to this, is the impact of recent court decisions concerning the copyright work made for hire and joint authorship doctrines. These require careful due diligencip for copyright purposes is not the same as inventorship for patent purposes, and the distinction requires, among other things, careful analysis of the assignments the contributing party may need to obtain from its employees and independent contractors in order to grant rights to the venture and to other alliance members.
Fifth, online publications and services are increasingly intended for the international market. Patent and trademark registration protection is territorial. Copyrights have been quasi-internationalized by virtue of conventions and treaties, but the scope of protection for computer software, especially with regard to protection against non-literal infringement, depends on the domestic laws of each country. Accordingly, intellectual property due diligence must be international in scope. This means that adequate time must be reserved to review documents in foreign government and foreign corporate files.
"Moral rights" in particular can present challenging problems in the international context. Briefly stated, moral rights provide an artist with the right to prevent others -- including those who have lawfully acquired title and all of the copyrights in his or her work -- from making certain changes to the work, and the right to be identified as the creator of the work. Moral rights receive stronger protection in some European countries than in the United States. For example, in some overseas countries, moral rights may be inherited by an author's descendants although they would not be in the United States, and certain foreign countries may recognize moral rights in a work even if no such rights attach to the same work under U.S. law. Similarly, a work created abroad may be encumbered by moral rights although the same work, if created by an American citizen in the United States, would not be (if, for example, if the work had been created as a work made for hire under U.S. law).
Sixth, and finally, the results of intellectual property due diligence will determine the nature of the representations and warranties which should be made by, and the indemnities which should be received from, the party contributing content or technology to the strategic alliance.

II. The Subjects Intellectual Property Due Diligence Should Address

The basic intellectual property due diligence inquiries to be answered in connection with online products and services and the development of Web sites are as follows: (1) whether the venture party owns the contributed property, or has a license right sufficient to grant the alliance the right to exploit the contributed property in the intended manner; (2) whether the intellectual property rights in the contributed property are valid and enforceable; (3) whether any third party has any intellectual property rights in the property, and if so what the nature of the interest is; (4) whether the contributing party is bound by any agreement, obligation or restriction which would prevent it from granting the intended rights in the contributed property to the venture; (5) whether the contributing party (or other owner) has "perfected" the intellectual property rights through proper registrations, recordations and other filings in the U.S. patent, copyright and trademark offices, and if applicable, in foreign government offices; (6) whether there are defects in any such filings which need to be corrected; (7) whether intellectual property rights have been and are being properly kept in force through the timely payment of patent maintenance fees and the like, both in the U.S. and abroad; (8) whether the venture's exploitation of the contributed property will infringe an intellectual property right of a third party; (9) whether the contributed property is the subject of any past, pending or threatened litigation, and if so, what the effect of this is, or is likely to be, on the venture's intended marketing of the contributed property; (10) whether there are any aspects of the contributing party's past or current licensing practices which give rise to patent or copyright misuse or which would otherwise render the intellectual property rights in the contributed property unenforceable; (11) whether the contributing party has obtained proper U.S. and foreign moral rights waivers, permissions to use actors' names or likenesses, and permissions from entertainment industry guilds and unions and the like; and (12) whether the contributed property is subject to any existing or contingent security interests or similar encumbrances;
This article discusses current requirements for effective patent, trade secret and copyright due diligence.

III. Due Diligence Common to Patents and Copyrights

A. Administration of Due Diligence Investigations
Conducting and administering intellectual property due diligence requires identification of the proper person or persons to provide the information, obtaining and maintaining the information in a systematic way and developing procedures to identify and secure missing information, and integrating this material and supplementary information with the original information. In addition, in appropriate circumstances, opinion letters regarding validity, infringement and other matters should be researched and drafted by intellectual property counsel.
B. The Due Diligence Letter
One of the best ways to administer the due diligence process is to send an intellectual property due diligence letter to the contributing party. This letter should be prepared by intellectual property counsel after a review of the information which is initially available. It should contain a numbered list of questions and document requests similar in fashion to interrogatories and document requests used in litigation. In most cases, the responses should be provided in writing using the same numbering system. If a specific response is incomplete or if further information is needed, supplemental requests should be made using the original numbering system. When possible, a single person should be designated at the contributing company to provide the responses to the due diligence letter. In some cases, however, it is appropriate, depending on the technology involved, to have different individuals responsible for different matters.
C. Ownership
Title and assignment records in the U.S. Copyright Office and the U.S. Patent and Trademark Office (the "PTO") should be reviewed to verify that the contributing party owns the contributed property or has the necessary license rights. If the current owner received the rights from a third party by assignment, that assignment should be recorded (i.e., "filed") in the PTO or Copyright Office. If overseas rights are involved, foreign government records should also be checked. In some cases, government title and license recordation records are incomplete. This commonly occurs when not all of the transfers have been recorded. Accordingly, time should be allowed in the due diligence process to reconcile any gaps in the official record indicated by information contained in corporate files.
D. Security Interests
Government records also should be investigated to determine whether the contributed property is encumbered by any security interests. In some cases, rather than grant a security interest, the owner may have actually assigned ownership of the property to a creditor as a means to the same end. In such circumstances, the property should be "re-assigned" to the original owner. Occasionally a security interest will be mistakenly entered as an assignment in official records. This means that the underlying documentation may need to be reviewed. It should also be determined whether there are any contingent events, other than failure to repay a loan, which would require the assignment of intellectual property rights to a third party. In addition to a search of the records in the PTO and the U.S. Copyright Office (and their foreign equivalents, if appropriate), a search for Uniform Commercial Code filings may be required in state and local government records.

IV. Patent Due Diligence

As noted, intellectual property issues arise both in connection with the "content" of online products and services and the "technology" used to access such products and services. The "technology" includes browsers and other software tools. Patents are relevant to this type of software. In this connection, the first issue is whether the software is subject to patent protection. The second issue is whether the software infringes any patents of third parties. The special areas of due diligence which should be undertaken with respect to patents and pending patent applications are discussed in this Section.
A. Maintenance Fees
Patent rights can lapse if government fees are not paid on a timely basis. The due diligence investigation should determine if these fees have been and are being paid. In the U.S., these fees are called "maintenance fees," and are due periodically during the term of the patent. In Europe and elsewhere, similar fees are called "annuities," and are due each year. Significantly, annuities must be paid even during the application phase before the patent issues. They must be paid after issuance to keep the patent in force during its term.
B. Determination of the Remaining Patent Term
The remaining term of any patent should be verified to be certain that it constitutes a commercially useful period. While many patents related to software and online products or services may have issued only recently, the issue of the length of the remaining term should not be overlooked. In the case of an older patent, it is important to determine the remaining term in order to assess the patent's value to the venture.
C. Determination of Whether the Contributing Party's Patents Cover the Contributed Property
The claims of the issued patent, or the pending application if the patent has not yet been allowed, should be reviewed to determine if they cover the products, processes or methods which the venture party intends to contribute to the alliance. In the case of an issued patent, the official prosecution file (referred to as the "file wrapper") should be obtained from the PTO and analyzed to determine whether any representations made by the application to the PTO during prosecution limit the scope of the claims. In the case of pending applications, any Office Actions issued by the PTO also should be reviewed.
D. Determination of the Validity of the Patent
A "validity search" is conducted to determine whether the claims of the contributed party's patents (or pending applications) are valid over prior art. Prior art may include technical literature and other publications as well as previously issued patents. Individual circumstances will indicate whether a literature search is warranted.
E. Determination of Whether the Contributed Property Infringes a Third Party's Patent Rights
In addition to analyzing whether the patent covering the contributed property is valid, it is also important to determine whether the contributed property infringes a third party's patent rights. This requires an identification of relevant third party patents, if they are not already known, a determination of whether those patents are subject to an infirmity which would make them invalid, and an analysis of whether their claims are infringed by the contributed property. An analysis under the "doctrine of equivalents" may be needed even if the contributed property does not "read" exactly on the patent's claims.
If allegations of infringement have been made against the contributing party's patent in the past, or if for another reason the contributing party retained patent counsel to issue an opinion letter on the validity of the third party's patent and/or its infringement, those opinion letters should be obtained and reviewed. Any qualifications in the opinions should be carefully analyzed. Moreover, depending on their date and scope, the opinion letters may need to be updated.
F. Special Patent Litigation Issues
If there are any past or pending infringement suits, relevant litigation documents should be reviewed. If the contributing party is a defendant, then the likelihood of a judgment of infringement should be assessed as well as the scope of a potential damage award and the impact of any temporary or permanent injunction. Treble damages and attorneys' fees can be awarded in instances of willful infringement, and these issues must also be evaluated. If the contributing party is a plaintiff, then there is the risk that its patent may be held invalid in the litigation. Accordingly, the impact of the loss of exclusivity and the loss of the revenue from patent royalties must also be assessed.
G. Competitors' Pending Applications and the Use of Foreign Patent Applications
In some cases, the contributing party or other venture party may be aware that a relevant U.S. patent application has been filed by a competitor. The alliance may wish to evaluate those potential patent rights. By law, pending U.S. applications are secret and cannot be disclosed to third parties by the PTO. However, if foreign counterpart applications have been filed, the general rule is that they will be published 18 months after the filing date, whether or not the patent has issued at that time. Thus, obtaining and reviewing the foreign application can provide good insight into a pending U.S. application which is otherwise secret, because in many cases, the foreign application is based on the U.S. filing.

V. Trade Secret Due Diligence

The continued value to the alliance of contributed property which is protected by trade secret and non-disclosure agreements will depend upon how well the contributing party and its employees protect proprietary information. Similarly, other venture parties may need assurance that their confidential information, know-how and trade secrets will not be disclosed outside of the alliance by other venture parties. For these and other reasons, an investigation should be made of the practices and procedures used by the venture parties to protect trade secrets and materials received from third parties under a duty of confidence.
In addition, it should be determined whether managerial, technical and other key employees have signed confidentiality agreements, and whether the company routinely conducts entrance and exit interviews covering intellectual property matters. It should also be determined whether key employees have recently left the company to join or set up a competing firm, or if there is any potential liability for misappropriation because a new employee was recently hired from a competitor.

VI. Copyright Due Diligence

A. Computer Associates v. Altai
The decision in Computer Associates v. Altai, supra, a computer software case, has implications for both copyright registration and due diligence. As a result of that case, the type of copyright due diligence which is now required is more sophisticated than that required in the past. In Altai, the Second Circuit adopted a three-step "abstraction-filtration-comparison" test for determining whether a computer program is "substantially similar" to another program so as to infringe that program. The court acknowledged that this test will result in narrowing the scope of copyright protection for computer software. During the second step in this test, the "filtration" analysis, the "expression" in the program, which is protected by copyright, is separated from the underlying ideas and the unprotectable elements. In addition to ideas, the court identified three elements of the program which are not entitled to copyright protection: elements of the program which are already in the public domain; elements of the program which are dictated by "efficiency" and elements of the program which are dictated by "external factors."
The "external factor" criterion is noteworthy because it excludes from copyright protection those aspects of program routines which are included to satisfy one of the following: (1) the mechanical specifications of the particular computer hardware on which the software is intended to operate; (2) the compatibility (or "interoperability") requirements of other software; (3) computer manufacturers' design standards; (4) what the court referred to as the "demands of the industry being serviced;" and (5) what the court referred to as "widely accepted programming practices within the computer industry."
Thus, under Altai, copyright protection is reduced for those aspects of the program which are included to achieve compatibility with other software and hardware. This is particularly important in the online field, where compatibility is important for commercial success.
B. The Impact of Altai on Copyright Due Diligence
Altai raises the possibility that a U.S. copyright registration for computer software can be rendered unenforceable if the copyright claimant failed to disclaim authorship of elements of the program which are dictated by efficiency or external compatibility requirements. (A failure to disclaim public domain elements may also render the registration unenforceable.) The impact on due diligence is as follows.
First, due diligence must continue to cover such "traditional" copyright subject matters such as verifying title to the copyright, and when registration has occurred, reviewing the accuracy of the facts recited in the certifications. Second, as a result of Altai, copyright due diligence should also determine whether authorship has been claimed in those elements of the program which that case held are not protectable, even if any "over-statement" of copyright was made inadvertently as a result of a failure to sufficiently tailor the copyright registration application to the teachings of Altai. In short, the party conducting due diligence must analyze the copyright prosecution file and registration statement from the perspective of a hypothetical infringer who will seek to avoid liability by challenging the enforceability of the registration. In order to conduct the type of due diligence suggested by Altai, it may be necessary to interview programmers, systems analysts and others involved in software development as well as those familiar with external compatibility and industry standards. If appropriate, it may be advisable to cure any potential deficiencies in the registration by filing an application for a corrected copyright registration certificate.
If the alliance or any venture members are intending to file copyright registration applications, they should conduct similar inquires to ascertain the facts regarding the Altai factors in order to file proper applications. It also should be noted that an invalidation of a U.S. copyright registration or the entry of a judgment in a U.S. court that a copyright is unenforceable may also have an impact on the ability of the copyright owner to enforce the copyright overseas.
C. Determining Whether the Venture Has Obtained All of the Necessary Copyright Rights From All of the Necessary Parties
The copyright in a work can be divided and can be assigned or licensed in whole or in part by the copyright owner. Especially in the context of pre- existing "content" works, this raises the possibility that the owner or licensee of one of the copyright rights in the works may not own all the copyright rights which are required to incorporate the work into an online product or service (including a Web site). Accordingly, the strategic alliance should conduct due diligence to verify that it is acquiring all of the necessary copyright rights from all of the proper parties. It is important to verify that the party granting specific rights has the rights to grant.
Music rights illustrate this issue. In order to incorporate a musical work into a product or service or use it in a Web site, the alliance will need the following rights, which may be held by different entities: "mechanical rights," which are required to manufacture and distribute physical objects (such as CD- ROM's) in which the recording of a musical composition is embodied; "master recording rights," which are required to reproduce and distribute a specific performance of a musical composition by a specific artist; "synchronization" rights, which are required to synchronize the playing of musical compositions with visual images; and "public performance rights," which are licenses required from the composer to perform the work publicly.
Another example is provided by still photography. The practice in that industry is for a traditional book publisher to receive only a limited grant of rights. Often the publisher has the right to reproduce the photographic image only in a specified size, at a specified resolution and only on a single page. Such limitations are inconsistent with the intended use and display of the image online (or in a multimedia work). Thus, the venture may need a grant of rights from the photographer (or actual copyright owner) rather than only from the publisher. The difficulties (and high transaction costs) involved in identifying the proper rights of owners in pre-existing works and in obtaining the appropriate licenses make it important for the alliance to obtain strong intellectual property representations and warranties from the contributing party and back them up with meaningful indemnities.
As a result of recent copyright work made for hire decisions, copyright due diligence should also focus on whether the contributing party acquired valid ownership rights in software written for it by employees and independent contractors. The copyright "work made for hire" doctrine provides an exception to the general rule that the author and initial owner of a copyrighted work is the person who actually created the work. The work made for hire doctrine has two branches. Under the first branch, the employer is the author and owner of a work created by an employee within the scope of his or her employment. Under the second branch, a work created by an independent contractor, or by an employee outside the scope of his or her employment, can be a work made for hire only if the parties expressly agree in a written instrument that the work is a work made for hire and only if the work itself fits within one of the following nine statutory categories: a contribution to a collective work; part of a motion picture or other audiovisual work; a translation; a supplementary work; a compilation; an atlas; an instructional text; a test; or answer material for a test. 17 U.S.C. s 101.
In CCNV v. Reid, 490 U.S. 730 (1989), the Supreme Court adopted a test for "employee" for copyright work for hire purposes which is more stringent than the tests which had been previously followed in the Second, Fourth and Seventh Circuits. CCNV and subsequent Court of Appeal and District Court decisions establish a test for "employee" for copyright purposes which essentially requires that the individual be a "W-2" type of employee for tax purposes and receive employment benefits. As a result, software written by computer programmers who are not W-2 type employees will not qualify as a work made for hire. In addition, because software does not readily fit within one of the nine statutory categories, the software cannot be created as a work made for hire (at least in most cases) even if the parties have entered into what is intended to be a work made for hire agreement. Thus, the "hiring party" can acquire rights to software created by an independent contractor, or by an employee outside the scope of his or her employment, only if the hiring party receives an assignment of the hired party's copyright rights.
When the contributing party represents that it acquired copyright rights in software on a work made for hire basis, due diligence must verify that the hired party was actually an employee for work for hire purposes, and that the software was written within the scope of the employee's duties. When the contributing party acquired copyrights from an independent contractor, due diligence must verify that an adequate assignment was made.
Another issue which arises in connection with software written by an independent contractor is whether the contractor knowingly or inadvertently incorporated code owned by a prior "employer" because of a prior assignment or because the code was originally created by the hired party as a work made for hire. Thus, the intellectual pedigree of the copyright in code contributed by an independent contractor (and in some cases, by employees) also may need to be investigated.

VII. How Software Created for an Online Work Can be Created as a Copyright Work Made for Hire When the Same Software, Standing Alone, Could Not Qualify

The development of multimedia and online works (including copyrightable aspects of Web sites) gives rise to the possibility that software which is part of such a work can be created as a work made for hire even when the same software, standing alone, would not qualify as a work made for hire. The structure for this is as follows: (1) For copyright purposes, an online or multimedia work can be considered a unitary work covered by a single copyright registration under Copyright Office rules if the following requirements are satisfied: (a) the copyright claimant is the same for all elements in the work for which protection is sought, and (b) all such elements of the work were published at the same time (excluding, however, pre-existing elements, which in any event are not subject to a claim of authorship in the registration application). Thus, a single copyright registration can cover the software and other elements of the work. (2) Under the U.S. Copyright Act, an audiovisual work is a work which consists of a series of pictorial images (such as photographs, video, computer-generated images and so forth) that are intended to be viewed as part of a series (e.g., a film strip) -- even if the images themselves are not moving images -- together with any accompanying sounds. A collection of photographs can be considered an audiovisual work if there is audiovisual authorship in the panning and scanning, fading in and out, and other editing techniques used to create a series of images. (3) An online work can be treated as a unitary work for copyright registration. A work which contains audiovisual elements can qualify as an audiovisual work under the Act. To qualify, the work need not be predominantly audiovisual in nature, but the audiovisual component must constitute more than a small amount of the entire work. (4) Thus, when the software is part of an online work, and such work is classified as an audiovisual work under the copyright registration rules, the software is considered as part of an audiovisual work, and because audiovisual works constitute one of the nine statutory categories which qualify for work for hire protection under the non-employee branch of the doctrine, the software can be created as a work made for hire owned by the commissioning party.
The result is that software for an online work created by an independent contractor, or by an employee outside the scope of his or her employment, can be created as a work made for hire if the appropriate written instrument is executed. The same analysis applies to software written for multimedia works, which also can qualify as audiovisual works. In Schiller & Schmidt, Inc. v. Nordisco Corp., 969 F.2d 410 (7th Cir. 1992), the court held that the instrument must be executed before the work is developed to create a work made for hire.

VIII. Special Internet Web Site Development Issues

A. Web Site Development Agreements
Special intellectual property law issues arise in building an Internet Web site. Typically a Web site owner will hire a Web site developer to design and/or help build the site, and typically the developer will be an independent contractor and not an employee of the site owner for copyright purposes. In such cases, the copyright in the work created by the developer will not be automatically owned by the Web site owner under the first branch of the copyright work made for hire doctrine. (See discussion above in Section VI.) To acquire copyright ownership, the Web site owner will need to secure an assignment of the copyright (which should cover other intellectual property rights as well) or have the work covered under the second branch of the doctrine by structuring it as a contribution to audiovisual work as discussed in the preceding Section. If the site developer subcontracts some of the work to other independent contractors, then rights will need to be obtained from such individuals as well.
From the point of view of the Web site owner, having the copyright owned by the developer can present several potential problems. To retain their value, Web sites must be constantly updated with new content, and as technology evolves, with new interactive and other features. With respect to the content, the Web site owner needs to own the copyright, or at least have adequate license rights, so that the content can be modified and updated as the Web site evolves. In many cases, copyright licenses will need to be obtained not from the site developer but from the third party owners of pre-existing content. With respect to design features of the Web and other copyrightable material created by the developer, the Web site owner will be best able to make, and have others on its behalf make, modifications and derivative works of these features if it owns the copyright in them. A sufficiently broad license can accomplish the same objective. Thus, from the Web site owner's perspective, copyright due diligence should verify that the owner has sufficient rights to update and modify the site. On the other hand, the site developer probably will wish to retain intellectual property rights in such work so that it can use work again in developing a site for another client. The possibility that the developer will re-use such work in another site, however, may be of great concern to the Web site owner, because the owner may not wish to see distinctive features of its site replicated elsewhere. The site owner and developer are likely to reach some compromise regarding the developer's right to re-use its work product in other sites and do work for other clients, and due diligence should confirm that the intellectual property rights retained by the developer do not undercut the business agreement reached on this point.
In addition to copyrights, patent rights and patent due diligence are also involved in Web site development. Patent rights may apply to browsers and other software used in connection with the site.
B. Pre-Existing Rights
When the Web site owner is the second or later client of the site developer, the site owner should conduct due diligence to verify that the site developer has the right to grant the site owner the rights to use the work product for the site, and that these rights have not been previously assigned to a prior client of the developer or are the subject of an overly restrictive license.
C. Hypertext Links
Web site owners and developers will need to ensure that they and the site users have the right to use (and if necessary, modify) hypertext links and the "documents" that are linked to the Web site, and the right to download, cache and make other electronic use of computer files that can be accessed through the site.
D. Newly Created Intellectual Property
Another issue that will arise is which party will own the new intellectual property created in the course of setting up or enhancing the Web site, especially when the intellectual property is created through the joint efforts of the parties. This issue is complicated where there is more than one party on each side of the site development project or where different companies form a strategic alliance or joint venture to operate the site or develop it. (Such issues also arise in any strategic alliance or joint venture in the online field.) From the copyright perspective, this activity may or may not result in joint authorship and joint copyright, and copyright rights might be shared by virtue of assignments or licenses. As noted above, patent inventorship is different from copyright authorship. It covers different subject matter and has different ownership rules. Furthermore, elements of the ownership and license rights in new intellectual property will need to be allocated between the parties. Often a party is a member of two or more ventures that compete with one another. A concern that arises in this context is that in making the allocation of rights to the different venture parties, one or more parties may obtain rights that enable it to compete with the venture itself.
E. European Privacy and Database Protection
The use and transmission of, and provision of access to, personal information about individuals in an online database should be investigated to determine if it complies with the provisions of the European Community Database Directive where applicable. The Directive sets out certain privacy rights, and requires obtaining permissions from individual "data subjects" and providing notice in specified circumstances, cross-border data flow and real-time processing can be subject to the Directive, and online use of data makes this issue very important.
The Directive also provides a new sui generis right of protection supplements copyright protection and is intended to prevent the unauthorized extraction of data from a database. This right applies to both copyrighted and uncopyrighted databases, and applies to an entire database and to substantial parts of a database.
F. Future Technology Clauses
"Future technology" clauses are often used when a party wishes to acquire rights to exploit a work (generally content) using emerging technologies. Due diligence must determine whether the future technology clause is adequate to the needs of the online environment. For example, it is common to use a future technology clause to grant rights in "all media now known or hereinafter invented." However, what rights this clause modifies and where it is placed in the agreement are of critical importance. From the perspective of the Web site owner, the future technology clause should apply not only to the medium in which the works are contained, but also to the manner in which the works will be distributed to, or accessed by, the user. If this future technology clause modifies only the right of reproduction, it will not necessarily provide the right to distribute the work in all future media. Such distribution methods are obviously important in online ventures. The scope of any exceptions and reservation of rights and their impact on online services also must be carefully examined.
G. Public Domain Works
Web site owners and developers are often attracted to the idea of using public domain works because of the difficulty and expense of obtaining adequate licenses to use pre-existing works. However, several potential problems can, in fact, make it very expensive to determine if a work in fact is in the public domain and available for free. First, the term of copyright for works which were not made for hire expires 50 years after the death of the author or last surviving joint author. Because it can be difficult to determine the relevant date of death, it can be difficult to determine if a work has entered the public domain on this basis. Second, copyright protection for works covered by the 1909 Copyright Act (generally those first published before January 1, 1978) could lapse if the copyright registration had not renewed before the expiration of the initial 28 year term. (Note that a recent copyright amendment made renewal automatic for 1964-1978 works.) However, even if the copyright in a work such as a motion picture lapsed because of a failure to renew, it does not mean that a Web site owner or developer can use all elements of the film without restriction. The sound track in the film or the underlying work such as a novel or play may have been separately registered and properly renewed. In that case, use of elements of the film may infringe the surviving copyrights in those works, which are not in the public domain. Rights then will need to be obtained under those works.
Third, there is an international component to this issue. Some foreign countries follow what is referred to as the "Rule of Shorter Term," which provides that if copyright protection lapsed in the United States because of a failure to renew, then the work will also lose copyright protection in the foreign country at the date renewal was due in the United States, and this will occur even if the term of protection would otherwise be longer in that country. Fourth, certain foreign works which entered the public domain in the United States have had their U.S. copyrights "restored" under another recent copyright amendment. Due diligence requires a careful checking of U.S. Copyright Office and other records to ascertain the current status of these works.
H. Internet Domain Names
Although treatment of this issue is beyond the scope of this article, it should be noted that obtaining and protecting domain names and resolving disputes regarding confusion between such names, and any trademarks that may apply, is very significant issue, and the law is developing rapidly in this area.

IX. Determination of Whether Patents and Copyrights Are Unenforceable Because of "Misuse" in Licensing Practices

One aspect of intellectual property due diligence is ascertaining whether rights are currently enforceable even if they were validly obtained. Patent misuse is a well-established equitable defense to infringement liability. The doctrine provides that the patent cannot be enforced until the misuse is purged. Misuse results when the patent owner attempts to impose restrictions on licensees beyond the scope of the patent grant. Examples include requiring royalties after the expiration of the patent term; requiring the licensee to license a portfolio of patents rather than the single patent desired; and a "tie-out," or granting a patent on the condition that the licensee refrain from dealing in products that compete with the patented product. Significantly, misuse in a contract involving a third party is sufficient to render the patent unenforceable even against a licensee for whom there is no misuse in his license with the copyright owner. In Lasercomb American, Inc. v. Reynolds, 911 F.2d 970 (4th Cir. 1990), the Fourth Circuit recognized the doctrine of copyright misuse, which is based on patent misuse. Copyright misuse may result when a copyright license imposes restrictions on the licensee beyond the scope of rights granted by copyright to the licensor.
The impact of patent and copyright misuse on due diligence is as follows: in appropriate circumstances, it may be advisable to review the licensing practices of the venture party who owns a patent and/or copyright in order to assess whether contract provisions with third parties constitute misuse which would impair the enforceability of the intellectual property right, and thus reduce its value to the venture.

X. International Conflict of Laws for Internet and Online Copyrighted Works

A. Introduction to International Copyright Conflict of Laws Analysis
International conflict of laws rules complicate copyright due diligence for Internet and online activity. Online publications and services are accessed across national borders through use of the "global information infrastructure." For example, the author of copyrighted material on the Net may have been created by a citizen of one country, the work may be stored on a server in another country, and the work may be distributed or copied without authorization by a person in a third country. The copyright laws of different countries may apply to different aspects of this and similar transactions, and the laws of those countries may be different.
Copyright law has been only quasi-internationalized by international treaties such as the Berne Convention for the Protection of Literary and Artistic Works and the Universal Copyright Convention. At base, copyright laws are territorial, and international treaties allow member states to enact domestic laws which differ from one another. In addition, the Berne Convention was written to accommodate two different copyright traditions. One is the Anglo- American common law economic model of copyright, and the second is the continental European civil law droit d'auteur (authors' rights) system. Partly because Berne was written to accommodate these different systems, the standards provided in the Convention may be insufficient to address the problems of the dissemination of copyrighted works in digital form. [FN1] As a result of this, the international nature of online transactions gives rise to difficult international conflict of law issues with regard to copyrighted works. This Section summarizes key conflict of law issues which should be considered in structuring online transactions and in conducting copyright due diligence.
The scope of protection afforded under the copyright laws of foreign countries is important because of the limits on the reach of U.S. law and U.S. courts. In general, acts of copyright infringement that occur outside of the United States are beyond the reach of the U.S. Copyright Act and U.S. courts. However, U.S. copyright laws may be applied in circumstances where the infringing acts have a territorial connection with the United States, such as when part of the infringing conduct occurs within the U.S. In addition, once infringing activity is established in the United States, recovery of profits from an infringer's extraterritorial infringement may be possible as well. In some circumstances where there is jurisdiction over an infringer in the United States, a U.S. court may hear a case involving infringement of works subject to foreign copyright. The basis for exercising jurisdiction in such circumstances is that copyright infringement is a "transitory" cause of action and the defendant may not be subject to jurisdiction in another forum that is convenient to the copyright owner.
Online authors and service organizations need to rely on copyright as a means of achieving protection outside of their "home" country. The Berne Convention is an international treaty by which member nations recognize copyright protection for works originating within another member country. More than 100 countries are Berne signatories as of this writing, and they include virtually all of the industrial countries in the world. [FN2] (Most countries which are members of the Universal Copyright Convention are also members of Berne.) In general, the Berne Convention relies on the principle of "national treatment" in extending copyright protection to authors of other member states. Under the principle of national treatment, Berne requires that a member country provide the same level of copyright protection to works of other member countries that it provides to works of its own citizens, subject to the provisions of the treaty. (This is to be distinguished from the principle of "material reciprocity," under which one country would extend protection to the work of a foreigner only to the extent that the foreigner's country extends the same, or equivalent, protection to works of the first country.)
In addition, Berne prescribes certain minimum rights of copyright protection and prohibits formalities (such as copyright notice and registration) as a condition of copyright protection for works of foreign Berne countries. (Berne allows a member country to use formalities as a condition of copyright protection for works of its own citizens. The United States requires that U.S.- origin and non-Berne foreign works be registered before an infringement action can be brought in U.S. courts, but this requirement does not apply to works of foreign Berne countries.) A member country may, however, provide greater copyright protection than the required minimum. Illustrative scenarios regarding principles of conflict of laws are provided below. In them it is assumed that the acts take place in Berne member countries and that the work at issue qualifies for copyright protection under the Berne Convention.
B. Illustrative Scenarios for International Conflict of Law Analysis (1) Scenario One: A user in France accesses software copyrighted in the United States and causes a copy to be downloaded into a computer in Sweden. Which country's copyright law applies to the transaction?
The right to control reproduction is one of the exclusive rights granted to the copyright owner in all Berne countries. An action for copyright infringement may be brought where the defendant is subject to personal jurisdiction. Under Berne, the law to be applied is the law of the country where the copyright infringing activity took place, rather than the law of the country of domicile of the author or of the country where the work was first published. In this scenario, where did the infringing act occur? A likely possibility is that the infringement was the making of an unauthorized copy of the work by downloading the work into a computer in Sweden, where a copy was made and placed in the computer's memory. Under this analysis, Swedish law would apply because that is where the reproduction physically took place.
An argument could be made, however, that although the actual copy was made in Sweden where work was downloaded, the "activity" causing the infringing copy to be made actually took place in France, where the infringer executed the commands to cause the downloading. If a court accepted this line of reasoning, it would find that the infringement occurred in France. The result of this would be that French law would govern the infringement. A further twist on this example is provided in the next scenario, which raises the issue of transmission. (2) Scenario Two: A copyrighted work is digitally transmitted without authorization through an online connection from Country A to Country B. Which country's copyright laws apply? Country A, the country of origin of the transmission, where the transmitter resides, or Country B, where the transmission is received? [FN3]
As noted, under Berne, the law to be applied is the law of the country where the infringement "occurred." To decide this, the nature of the infringement must be determined. In this hypothetical scenario there are several possibilities. First, the individual on the receiving end of the transmission in Country B might store the work on a computer memory. As discussed in the first scenario, assuming that storage of the digital work would constitute the making of a "copy" for copyright purposes, the unauthorized reproduction would constitute the infringement, the law of Country B would apply.
A second possibility is that the act of transmitting the work from point X to point Y -- regardless of what happens at the receiving end -- itself implicates one of the exclusive rights of the copyright owner. Proposed copyright legislation now pending in Congress and based on recommendations from the "NII White Paper" [FN4] would modify U.S. copyright law to expressly state that the right to control electronic transmission is part of the copyright owner's right to control the distribution and publication of his or her work. (These are rights provided in Section 106 of the U.S. copyright statute.) Under the second interpretation, the act of initiating a download of data from the computer in Country A would constitute a "transmission," triggering an infringement within Country A (assuming that Country A recognizes the copyright owner's right to control transmission) at the time that the downloading begins. Accordingly, the copyright law of Country A would apply to a claim for infringement arising out of transmission.
A third possibility is that instead of storing the work, the receiver would convert the digital data into a form for presentation on a display of some sort (as might be appropriate if the copyrighted work were representative of an image or other graphical data). If it is assumed that the work is publicly displayed, then another of the copyright owner's exclusive rights is implicated, namely the right to control the public display of the work. Under this reasoning, the "display" -- and the occurrence of infringement -- would take place in Country B, and its law would apply.
The foregoing discussion assumes that there is no conflict among the copyright laws of the countries in issue, and more specifically, that each country has the same rules regarding the right to make copies (and that there would be no fair use or equivalent defense available in one country but not the others), the right to transmit the work, and the right to publicly display the work. Where a conflict arises between the laws of Country A and of Country B, however, the situation becomes more complicated, as illustrated in the next scenario. (3) Scenario Three: A user in Country A takes action to make a use of a work located on a server in Country B. The action would not be an act of copyright infringement in Country A, but would be infringing under the law of Country B. Which country's law applies?
Under this scenario, if the infringement is the unauthorized manipulation of the copyrighted work while in digital form on the server, or the transmission of the work from the server in Country B, then the "infringement" would appear to occur in Country B, and its laws would apply. On the other hand, if the alleged infringement involved the copying or publication of the work in Country A, then the alleged "infringement" would occur in Country A and the activity would be analyzed under its copyright laws.
There are several ways that the matter may be further complicated. First would be the situation where the alleged infringing activity touches upon both countries A and B. For example, suppose the work was manipulated on the server in Country B to create a derivative work which was then copied to memory in a computer located in Country A. Assume that the creation of a derivative work on the server would be infringing conduct under the laws of Country B but not under the laws of Country A, and further that Country A's law provides the minimum level of protection required by Berne and that Country B's laws exceed these requirements. A court sitting in Country B would (looking at the law where the infringement occurs) likely apply the law of Country B. However, if neither the creation of the derivative work nor the subsequent copying constituted infringing conduct under the laws of Country A, then a court sitting in Country A might apply the law of Country A and find no infringement.
Another complicating factor may be the location of the chosen forum and the nationality of the copyright owner. Assume for the moment that the copyright owner is a citizen of Country B and brings suit in that country. Aivity taking place in B would likely conclude that, under the general rule (looking to the laws of the state where infringing conduct occurs), there was infringement under the laws of B, and thus no reason to apply the laws of Country A.
Would a court sitting in Country A look to the laws of Country B and find infringement? This will depend upon the nature of the rights and remedies being enforced. Assume that the copyright owner is a citizen of Country A and that for Berne purposes the work is considered a work of origin of Country A. Assume further that Country A, as is permitted by Berne, provides Berne-required minimum level of protection to works of foreign Berne countries, but provides less than such level of protection for works of its own citizens. In such a case, a court in Country A could apply the law of Country A to this copyright owner and conclude that no infringement occurred. Furthermore, under current European Community Directives, it is possible that domestic laws enacted pursuant to an EC Directive could apply to nationals of European Union member countries and prevail over the Berne Convention even if a country's domestic law resulted in less protection for its citizens than is required under Berne.
C. Illustrative Court Decisions
The cases discussed below indicate the complexity that occurs in a conflict of law analysis and a court's decision on whether it will exercise jurisdiction when the infringement takes place in a country other than the forum country. (1) London Film Productions Ltd. v. Intercontinental Communications, Inc., 580 F.Supp. 47 (S.D.N.Y. 1984)
A British Company sued a New York corporation in U.S. District Court over infringing action that took place in several Latin American countries. The court found that it had diversity jurisdiction and personal jurisdiction over the defendant New York corporation. The court exercised jurisdiction even though the infringing conduct occurred outside of the United States because it viewed the infringement as "transitory" and that it would be more practical to adjudicate the claims in one court rather than piecemeal in each of the countries where the infringement occurred. (2) Tyburn Productions Ltd. v. Conan Doyle, 1 All. E.R. 909 (Ch. Div. 1990)
A British company sought a declaratory judgment in a British court that the company's use of Sherlock Holmes characters in the U.S. would not infringe the rights of the estate of Sir Arthur Conan Doyle. The British court deemed the copyright action to be local to the place of use, and declined to adjudicate the case on the ground that it could not exercise the sovereign power of the United States. (3) Herscovici v. Ste Karla, 146 RIDA 325 (Paris May 23, 1990)
A French court faced infringement occurring both in Italy and in France. It concluded that the claimant was not limited to French law but that the court should apply the forum-neutral Berne Convention so that the claimant would obtain the benefits of the law of the country in which part of the infringement took place, namely, Italy. (4) Subafilms Ltd. v. MGM-Pathe Communications, Inc., 24 F.3d 1088 (9th Cir. 1994)
The Ninth Circuit held that the U.S. copyright laws did not apply where all direct acts of infringement occurred outside of the U.S. and the only act occurring in the U.S. was the defendant's authorization of the foreign infringing activities. Because, according to the court, the U.S. laws have no extraterritorial effect, there was no infringement claim under U.S. law.
D. Copyright Classification of Works
How a work is classified for copyright purposes is an important aspect of international intellectual property due diligence. For example, if, as discussed above, under U.S. law software is considered for copyright purposes to be a contribution to an audiovisual work rather than a stand-alone product, then it will be subject to the second branch of the work for hire doctrine. If it is a work made for hire, then ownership due diligence is simplified, and the ownership of the work is not subject to termination in the 35th year, as would be the case if the copyright had been transferred by assignment.
Classification is important under the European system as well. The European Software Directive contains a decompilation right. This is essentially the right to reverse engineer software for the purpose of achieving interoperability, and is an exception to the copyright prohibition against making an unauthorized copy of the work. Under the Directive (and domestic law which implements it), if software is classified as a computer program, then it is subject to the decompilation right. This means that even a party without license can decompile the program without liability. If, however, the work is classified as motion picture, then the decompilation right may not apply, because that right applies only to computer programs and not to other copyrightable subject matter, and the decompilation could constitute infringement.
E. Summary
In summary, the current status of domestic copyright laws in Berne member countries regarding electronic transmissions and displays (as well as public performances in certain cases) have the potential to create complex conflict of laws analysis for the online products and services across national borders. This in turn complicates the copyright due diligence that must be performed in connection with Internet and online strategic alliances and joint ventures.

Conclusion
The development of Internet and other online products and services place special importance on intellectual property due diligence. The due diligence investigation should reflect the nature of online and real-time uses as well as the impact of recent patent and copyright law decisions. It should also recognize the impact of European Directives and the conflict of laws analysis that must be performed for international transactions.

FNa1. William A. Tanenbaum is a partner in the Intellectual Property & Technology Law Group in the New York office of Rogers & Wells. He is the Immediate Past President of The Computer Law Association and the chairman of the Internet and Online Task Force. Copyright (c) 1996 by William A. Tanenbaum. All Rights Reserved.

FN1. The World Intellectual Property Organization, which administers the Berne Convention, has created a Committee of Experts on a Possible Protocol to the Berne Convention to study technological developments since the last revision

FN2. A complete list of the countries which are members of the Berne Convention, the Universal Copyright Convention ("UCC"), international neighboring rights treaties and bilateral copyright treaties with the United States and which are subject to the European Community Software Directory is set forth in the "Country-by-Country Guide to International Copyright Treaty Membership" written by William A. Tanenbaum. The Guide also indicates which countries are members of Berne but not the UCC and which are members of the UCC but not Berne.

FN3. It is assumed that the transmission would not be subject to any national or international laws that address or regulate satellite communications.

FN4. This is the Final Report (issued September 5, 1995) of the Working Group on Intellectual Property Rights of the Clinton Administration's Information Infrastructure Task Force.