Intellectual Property and Other Special Contract Situations
Intellectual Property

In a world of multimedia, high-speed communications that is coupled with the abundance of creative expression, protecting a party's rights to ideas, creations, and expressions, contract law has evolved to protect intellectual property (IP) rights. Unique, protected content requires a contract offering permission to be expressed or used by another source; otherwise, original providers of that content can sue unauthorized parties for infringement upon the originators' rights to reap economic benefit from expression of the work. Often, other entities seek to be granted permission to use material that can be protected under patent, copyright, trademark, trade secret, and service mark regulations.

To legally enforce their rights to inventions, ideas, trade names, and artistic expressions, creators must file an application for protection. This is done through the U.S. Patent and Trademark Office. Once protected, that entity has a legal right to claim origination and enforce a license it grants to another to recreate or reproduce the work through a contract.

A copyright grants economic rights to literary and artistic work, giving the author or artist the ability to legally make copies, distribute, display, or perform the work. A patent is considered a social contract with the public; it gives rights to an inventor in exchange for releasing the details of his creation to society. Mostly used in economic situations, a patent, like a copyright, also prevents others from copying certain designs without authorization. Trademark protection offers originators of distinctive symbols or signs that identify a source of "commercial value" the right to exclusively use the work. Name or brand recognition is the underlying reason for providing trademark rights. A variation of the trademark is the service mark which protects producers of services rather than goods. A company with a commercial advantage due to a unique and valuable creation (such as a formula) can be protected by trade secret rights.

IP Contracts

Contracts protecting IP rights grant permission from the licensor to the licensee to use or reproduce works without violating the protections due to the licensor. Such contracts usually have a defined time period, and many have significant limitations regarding reproduction rights. Licensing can be exclusive or non-exclusive, granting rights to only one party or to an unlimited number.

The licensing contract contains several clauses that are unique among commonly used agreements. While tangible, easily reproduced goods are used or copied without infringing on anyone's rights, IP contracts typically place limitations and conditions upon the licensee that may not appear in traditional contracts. Some common IP clauses include:
Use. A Use clause defines how, where, when, and under what conditions the licensee can control the work. This sometimes may limit the geography, quantity, and distribution method a licensor grants. Any changes in the use of the work typically require written notification of the licensor.
Warranties. Warranty clauses for IP contracts typically disclose the fact that the licensor has the exclusive right to extend and distribute permission to the licensee. Some explain that the licensor does not extend any warranties that cover unexpected discoveries of similar works or that claim a specific value for the IP.
Payment. Compensation amounts and timing of the payment are disclosed in the Payment Clause. Many times, residual payments called royalties are expected based on the licensee's sales figures. Payments in some contracts can extend for a lifetime and beyond.
Important terms used include:
  • Infringement. Prohibits others from copying, distributing, performing, or otherwise mimicking a copyrighted property without the protected owner's permission.
  • Grant of License. Describes the manner in which the permission takes place, including the duration and scope of the terms. The licensor grants the licensee a right to use and control a protected property under the terms of the contract.
  • Intellectual property. A proprietary (solely owned) creation of the mind worthy of commercial value protected by copyright, patent, trademark, or other legal restrictions.
  • Original work. An expression that can be proven to be the first, not a duplicate.
  • Confidentiality. Promises to not divulge, discuss, or express a protected work with unauthorized parties. Can include identities, formulations, design, components, literature, sounds, and other aspects requiring secrecy.
  • Work-for-hire. An agreement to pay a creator to develop IP on a project by project basis. Usually the hiring entity who commissions a work retains certain rights to the work.
  • Perpetuity. The term used to indicate an endless duration during which the rights are extended. A contract without a termination clause may extend rights "in perpetuity."
  • Fair Use. Used often regarding literary works, a minimal use of IP is allowable for several reasons without becoming an infringement of protected rights.
  • End User License Agreement (EULA). A license strictly with consumers; typically used in software products agreements. Specifies prohibitions on copying, distribution, and reverse engineering (a process of dismantling the complete product into its components in order to copy it).
Intellectual property owners can assign rights to creative works at various levels.
  • All Rights. Grants the licensee the right to apply the IP in any manner it chooses. Typically given to publishers and other mass media over an artistic work. This includes a license to copy, distribute, perform, or express through any medium of communication. The licensor is basically relinquishing their protections through this license.
  • Exclusive Rights. No other entity will be given the license to control the IP. The licensor is granting a negative right (which prohibits others) to the licensee. The licensor may include limitations on geography, form of expression, or the length of time the exclusivity applies.
  • Electronic Rights. Grants permission to distribute or express through digital, radio, television, and Internet formats. As more means of communication ( DVD, streaming video, database retrieval system, and others) develop, the right to control the IP may extend to the future formats unless electronic usage is limited in the contract.
  • Media Rights. Defines which modes of communication the licensee may use to express an artistic creation.
  • International Rights. Governs the permission given to control the IP across international borders. Usually applies to the distribution of products and materials, and can coincide with electronic rights through media that travels internationally.
  • North American Rights. Used often in literary IP contracts, these rights allow control of the work throughout the U.S. and Canada.
  • Rejection Rights. Allows one party to reject a work following a thorough examination, such as a lengthy literary work or a complicated invention. By including a rejection clause, a contract can become voidable by the rejecting party.

Social Contracts

To maintain order within a society, laws are developed which regulate activity and punish unwanted behavior. However, there are also unwritten "rules" that engender common behavior. As a society develops acceptable standards of interaction, individuals who live within the group enter into an agreement called a social contract with each other, and with the governments that rule the territory where they live. This type of contract is not made for economic gain; the parties enter the agreement for a purely humanitarian purpose, to maintain the welfare of the group. The terms of a social agreement may be written, such as the Declaration of Independence, or may be implied, such as refraining from harming a neighbor. Though some social contracts are not by parol, assent to these contracts is given by behaving in a way that conforms to an expected performance.

A marriage or civil union agreement is a social contract that binds two parties together in a legally recognized form. Although the agreement is made for noneconomic reasons, it may cause economic hardship or loss if the contract is "broken". Aggrieved parties may claim charges similar to business contracts, like breach or misrepresentation, though many times disputing parties agree to dissolve the relationship and settle the dispute.

Parties within a social contract have personal freedom and may be allowed to act autonomously (without supervision) but are held accountable by another party if a term is violated. They enjoy civil rights that are protected under the social contract by laws that punish violations. Parties are not confined to strict performance terms in order to adhere to the agreement; however, accountability is expected by others under the contract. If the conditions that are required are not adhered to, the offending party may be removed from the protected group. The fundamental purpose of a social contract is evidenced most often in certain settings. For example, there may be no law requiring financial support to a church by its parishioners, but inclusion in its membership may unofficially require participants to offer contributions under a social contract. By not contributing towards the benefits enjoyed by the group (in the form of spiritual growth and camaraderie), the unwilling member may not be welcome to attend future gatherings.

Contract Law and The Internet

Contracts involving transactions or use of products, services, and information delivered through the Internet are unique in U.S. contract law. Though the offer process and consideration requirements are similar to traditional contracts, acceptance is delivered in a different manner.

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History of Internet Law

Until the late 1990s, online transactions operated under common law. The need for uniformity within state laws prompted the National Conference of Commissioners of Uniform State Laws (NCCUSL) to develop regulations that states could enact, similar to the UCC. The Uniform Electronic Transaction Act (UETA), drafted in 1999, is the first set that addresses e-commerce transactions between buyers and merchants. Its scope covers the allowance of rights and access to information by one party to another through an electronic record.

The Electronic Signatures in Global and National Commerce Act (E-sign) came into law in 2000. This law endorses the validity of electronic means of indicating acceptance. The underlying premise, like the UETA, is that a record or electronic signature does not lose validity simply because it has been transmitted electronically. The Uniform Computer Information Transactions Act (UCITA) was made final in 2002. This set of regulations, which predominantly addresses software purchases, govern licensing of electronic information. The terms within the Act are viewed as controversial and have met resistance from a fair number of organizations. Ratified by less than half of the United States, it is seen by some as giving large software companies otherwise unenforceable rights and protections.

The UCC has been amended to include electronic transactions for goods because of the popularity of the medium. Over the past ten years, several laws have been passed covering issues such as electronic copyright protection, email acceptance validity, and online anonymity.

Communicating Acceptance

There are two fundamental concerns when conducting transactions over the Internet 1) has the offeree indicated acceptance, and 2) was the acceptance given intentionally and knowingly? Question #1 can be answered according to the E-sign legislation. A contract can be formed once an electronic signature is affixed to the electronic record. Question #2 can be a bit more difficult to argue. Did the offeree have an opportunity to understand the purchase conditions, and was he able to clearly indicate his intention? Although the methods of indication have become more certain, there can still be questions about an offeree's level of awareness when accepting the agreement.

As with traditional contracts, the law expects that parties understand and agree to all stated terms of a contract prior to offering assent. By communicating through written or verbal means, assent can be more easily recognized, but when parties communicate through the one-step technology available today, acceptance can be a murky issue. Typical purchases of goods, information, or services through the Web are performed through a point-and-click process. This is so easily done that acceptance to an offer can take only a second or two. Orders can be mistakenly placed if not reviewed carefully prior to executing the transaction.

During the early development of commercial activity through the Internet, an offering could be selected, paid for, and committed to, all in one step without verifying that the buyer intentionally wished to order the item. To guard against liability claims, most Internet vendors now include an Agreement Terms page which is accessed from the order form. There have been court cases that have required that merchants must gain acceptance of the terms in order to comply with the principle of consent in the UETA. Assent is typically given by clicking on an "I Agree" button then the order can continue to be placed. This step enables the user or offeree to authenticate their understanding of the terms, obligations, and conditions of their decision to buy. Even adding this step might not prevent a disputing claimant from denying that they entered the contract knowingly and intentionally. A party may claim that they accidentally clicked the "I Agree" icon prior to reviewing the agreement content.

One measure that helps merchants defend themselves against a buyer's rescission of his assent is to require confirmation during the steps towards agreement. One way to accomplish this is to require more than one button be clicked before moving on with the sale. This reduces the chance that the other party would unknowingly enter into the contract. By requiring the offeree to advance through at least two web pages in order to confirm his assent to the terms, an offeror can reasonably conclude that the offeree understood what he was assenting to.

For merchants another step to avoid mistaken or unintentional assent is by requiring a web page that lists the purchase details to be displayed prior to the final step of confirming an order. Many online retailers provide a printable form that buyers can retain as a paper trail. Another method of confirmation is to send an email to the offeree's email address. For offerors, the more methods of confirmation that are involved, the more solid a defense against liability can be.

As a protection against unintended assent, offerees may cancel a contract for sale of goods within three days of the order, according to the Federal Trade Commission's Three Day Rule. The rule states that purchases made at a location other than a vendor's "permanent place of business" may be returned and payment canceled; therefore an online order agreement qualifies under the rule.

Making Offers Online
Merchants selling through the Internet must follow the UCC standards that traditional vendors must abide by when structuring and distributing offers. The Federal Trade Commission oversees marketing practices, requiring that offers are "clear and conspicuous" on a web page. Placement of terms within an offer is important: disclosures should be close to any claims that are made, and should precede triggering actions, such as placing an order. Additionally, claims and disclosures should be "prominent" within a web page. Advertising language should be understandable to the intended audience. Viewers should be clearly prompted to access lengthy disclosures through scrolling down a long web page or using a hyperlink to open another page. Offers must also be free of distracting features and language that is confusing.
Resolving Disputes

Because of the lack of physical boundaries, the Internet presents a unique challenge for handling disputes. Commercial trade over the Web crosses territorial jurisdictions; therefore, the choice of forum is a term that should be included in online agreement. Typically, a clause addressing this issue is included in the Agreement Terms page.

If no forum is agreed to by both parties, jurisdiction is commonly determined by the amount of contact the offeror (typically the seller) in one state has with the offerees (typically buyers) within another. A website that shows intent to purposely avail itself to other jurisdictions outside its home state can often be bound by the laws of the other jurisdiction. For example, if an auction site based in California becomes involved in a dispute with a member from Texas, if no forum selection or choice of law is made between the parties, court action may likely be held in Texas.

Online contractors have options to resolve disputes similar to parties using traditional methods to contract. Particularly damaging circumstances usually require court intervention. The court in which a dispute claim is filed will determine if it is the appropriate forum by examining whether it controls personal and subject matter jurisdiction. If the litigants are residents of different states, and an injury or loss occurred in a third state, it is possible for the case to be adjudicated in one of those three states. The court must also determine the choice of law, meaning the most appropriate state laws of the relevant site (the claimant's state, the defendant's state, the state where the injury occurred, and so forth).

At question will be whether or not the website operator had sufficient minimum contacts with visitors from another jurisdiction. The answer is usually based upon the level of interaction and the number of visits between site and visitors in that state. United States courts divide websites into three classifications 1) fully interactive, where visitors can place orders, make payment, communicate directly through the site, and enter agreements, 2) somewhat interactive, where two parties that are beyond the site's control can enter agreements and conduct transactions, like eBay, and 3) passive, where information can be seen and communication can be conducted, but no transactions or agreements take place.

As of late, alternative dispute resolution methods have become more popular. The practice of online dispute resolution has grown in popularity. Arbitration, mediation, and negotiation can all be offered through a third-party website. This forum brings parties together by linking them through communication technologies like instant messaging or video conferencing. Claimants file claims and responses like traditional parties would, and are bound by the same resolution outcomes.