Friday, May 31, 2013

Business Insider's Bizarre Take on Musks's "Hyperloop"

Jay Yarrow at Business Insider just penned this piece about Elon Musk's "hyperloop" concept.

While I'm sure that Mr. Must has something very interesting up his sleeve, I just wanted to point out that the idea discussed in that article, an underground vacuum maglev system detailed in a 1972 RAND paper, is utter, fantastical nonsense. Not only are tunnels fantastically expensive and time consuming to build (Second Avenue Subway? LIRR / GCT connection? Anyone?) the idea of sustaining a vacuum in anything remotely that large is pure, unabashed science fiction. It is literally impossible. No amount of money or clever engineering could make that happen. It would literally be the most expensive engineering project in history by a few orders of magnitude, and it would still fail.

My guess is that Mr. Musk - a fully qualified engineer - has nothing of the sort in mind, simply because it is a child's fantasy. However, what Mr. Musk has described, a magnetically propelled super-sonic levitating train, is not much different than magnetic trains that are already all over the planet. The trick is to ensure stability past the sound barrier on the ground, a non-trivial problem, as well as ensuring that friction is low enough. My bet is about 100:1 that this is what is on the table, and not a gigantic vacuum tube system.

Tuesday, May 28, 2013

Wired Misinterprets the Market Failure in Console Gaming

Wired had an article recently about the new Xbox One announcement. The Xbox One announcement has been really, really panned, and for a whole lot of good reasons. I won't get into the details of all the criticisms, such as the fact that you may have to pay a subscription service to MSFT to play your pre-existing subscription cable, or that it is an 'always-on' service, etc. etc. However, I will talk about the fact that it seems that the Xbox One it isn't really for gamers. Wired's Chris Kohler notices this, but draws the wrong conclusions, stating that:

It’s not hard to figure out what the gaming-first crowd wants: a super-powered box that connects to the TV, has a handheld controller and has a huge library of games from the biggest-budget epics to the breakout indie hits. They don’t want a PC because they don’t want to mess with settings and deal with crashes; they want a standard platform that Just Works. It can do other things, sure, but games are the meat and everything else is somewhere between the gravy and the pepper shaker.
Hey, that sounds like an awesome product! Tuned precisely to our very needs. Say, do you know how many companies — in the entire world — currently offer such a product?
From there basically goes on to say that the above must be either impossible to do properly or not be worthwhile financially. He hypothesizes:
There may be no way to make money selling a bleeding-edge $500 games-only box with $60 games anymore. The expense of producing it all may be well out of whack with what players are willing to spend to get it.
This smacks of speculation, because no one is even bothering to try to implement that business model. And the frank reality is that the systems that are currently being produced are vastly overpowered - you can still get really great graphics out of consoles that are not nearly as beefy as the latest releases. Further, because so much groundwork has been laid into the development of gaming engines, it is cheaper to produce games now, and millions are willing to pay good money to play them. Just ask Gabe Newell

So, Kohler has missed two important points.

First off, the actual lesson is that there is a current market failure: up until a decade ago, Sony was raking in the money in console video games - I don't think those consumers all died, rather, I think they are older and probably have more purchasing power, economic downtown notwithstanding. I'd argue that Sony's failure to capitalize on this same market is because it is pushing bloated multifunction set-top boxes focused on media into the market, and has lost focus on its core audience of gamers and gaming consoles. In other words, as demonstrated by the above historical console sales, there is a demand and no one is delivering.

Second, the point to take is that MSFT and Sony are both "out" of the gaming game and are in the middle of huge media plays. Right now they are trying to use their consoles as a way to shoehorn their media businesses into the living room, directly in competition with Apple. In fact, Sony's entire electronics division is losing money, while it is making most of its profits in media and insurance. Microsoft, in the meantime, has hired a former CBS executive, set up its own studio, and has signed a deal with the NFL. So the problem is that MSFT and Sony are competing with cable companies, HBO, Apple and Hollywood with this new generation of consoles, rather than competing with Nintendo and targeting gamers. Nintendo itself may have stumbled with the WiiU, because it is also crammed with distracting features, but the 3DS is doing fine and I'm sure the WiiU will hit its stride.

Currently, it seems that Sony and MSFT are more interested in getting your parents to watch the latest episode of Real Housewives of Microsoft, your siblings to watch HaloTV, the whole family to enjoy a movie from a wholly owned subsidiary, or the guys to socialcast their fantasy stats while they watch football, than to make a play at the core gaming audience once serviced by millions upon millions of, PSs, Xboxes, PS2s, and Xbox360s.

So fundamentally, where I see market failure and a big demand, Kohler has taken the fact that a) the market is being flooded with devices that intentionally address a totally different market segment - casual media consumers - to mean that b) that it is impossible to create a product that gamers do want, either because gamers aren't there or because it isn't profitable. Quite simply, b) does not follow from a).

I suspect the pendulum will swing back the other way, and not too long from now either. 

Sunday, May 26, 2013

Contract Drafting: Software Development Agreements

Recently, I was presented with a form software development Agreement. I asked a junior associate to give it a markup for outstanding issues as a learning exercise. It reminded me that many critical areas of contract drafting are simply not taught in law school, so consider this a first in a series of tips and pointers for drafting practical agreements.

Software development contracts are a lot like other creative development agreements, in that a person or corporation is creating a new work and transferring the IP rights to its employer. As a result, here are a few things to consider in any contract that controls the transfer of IP rights:

  • Clearly define "Intellectual Property." Make sure that such definition includes not just copyright, but trademark, trade secret, and all patent rights. This definition covers what will, and will not, be owned by the client at the end of the engagement. 
  • Work for Hire. As a client, you will want to ensure that all materials are being made as work for hire, and, if they are not deemed to be work for hire, then all IP rights are assigned to the employer.
  • Further Assurances. Again, as a client, you will want to ensure that the the party rendering the services will agree to execute any documentation acknowledging that the employer owns the IP created, assigning IP created, etc.
  • Further Assistance. Often, the developer's assistance will be needed in the future, whether for the purposes of litigation or aid in filing patents. Typically, such assistance is compensated at the averages rates paid during the original engagement.
  • Limitation of Liability. As a developer/contractor, you are going to want to waive all special and consequential damages, lost profits, interruption of services, and limit only to actual damages. Alternatively, you can limit to the fees paid to the contractor over the last [x] months, or a mutually agreed upon cap. It is not unusual for there to be a separate cap for indemnification liability over IP infringement, i.e., the general cap is at the fees paid over the last three years, but liability for indemnification provisions at 2x-3x those fees. There is often a lot of negotiation on this issue. 
  • Warranty. It is typical to disclaim any and all warranties, but often a client is going to want some sort of warranty that the work product is non-infringing. Carefully consider, either as contractor or client, the level of IP representations made: are you going to make a strict representation of non-infringement? One based on knowledge or negligence? As above, there will usually be negotiation on this issue. I find that, generally, as risk increases for the contractor / developer, rewards should increase as well. So it doesn't make a ton of sense to make a strict IP representation if you aren't getting well paid, as you are basically extending an insurance policy over the IP delivered for very little money.
  • Indemnification. largely the same considerations as the previous two. Consider what acts, either as a contractor or client, you want to indemnify the other party for. It is not unusual to indemnify the other party against third party claims made for breaches of the representations and warranties in the contract or due to your own negligence of willful misconduct.

A few things make software development, in particular, different than most other creative materials development contracts. Let's review them:

  • Pre-existing Materials. Often a contractor will include software developer prior to engagement, outside the scope of engagement, or generally applicable to the contractor's business, to the client. The contractor will want to retain ownership of this material, so they should make sure that the agreement specifies which software, if any, falls into this category, or specify which mechanisms will be used during the engagement for identifying such software. The client will want to consider how this affects pricing as well: essentially, the client will be leasing, and not buying, such software, so they should not expect to pay full freight for it. 
  • Open Source Materials. Contractors may include open source materials in final deliverables. Both parties will want to be up front about what open source agreements they are comfortable with (for instance, corporations tend to really dislike LGPL, for pretty understandable reasons), and make sure that both parties will have clearly established mechanisms for complying with the terms of such licenses. Additionally, the contractor must be sure that they are not incorrectly representing that they are transferring ownership of these materials, as that is simply not within their power.
  • Third party materials. Rather like open source materials, but privately owned software. For instance, if the developer delivers say, copies of Word® or OSX Server® to the client, the client will typically be responsible for procuring / maintaining such licenses. Again, as above, the developer must make sure that it is not incorrectly representing it has the power to transfer ownership of those materials.
  • Residuals. This one is often a big sticking point: typically, there are very strong non-disclosure provisions in software development agreements. Residuals clauses usually read something like this: 
    The Receiving Party shall be free to use for any purpose the Residuals resulting from access to or work with the Confidential Information of the Disclosing Party. "Residuals" means information retained in unaided memory by persons who have had access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. The Receiving Party shall not have any obligation to pay royalties for work resulting from the use of Residuals. However, this clause shall not be deemed to grant to the Receiving Party a license under the Disclosing Party’s copyrights or patents.
  • Often, developers gain a lot of important insight from complex projects. If clients are unwilling to agree to the above residuals clause, it may be worth considering if extra compensation is warranted.

Next time, I'll discuss how Statements of Work - the above notes are only for the Master Services Agreement. On top of that, in order to ensure that both parties are happy, there should be a detailed Statement of Work that explains what is being developed, milestones, testing criteria, etc. It is a document that requires as much careful thought as the underlying contract itself, and worthy of its own post. 

After that more to come on NDAs, Software Licenses, EULAs, TOS's...

In the meantime, happy drafting.

Thursday, May 23, 2013

Entertaining List of Prohibited Businesses for Credit Card Processors

Examining the Stripe TOS today, I discovered that they have a very long list of businesses that they will not service, including:

(1) door-to-door sales, (2) offering substantial rebates or special incentives to the Cardholder subsequent to the original purchase, (3) negative response marketing, (4) engaging in deceptive marketing practices, (5) sharing Cardholder’s data with another merchant for payment of up-sell or cross-sell product or service, (6) evading Card Network’s chargeback monitoring programs, (7) engaging in any form of licensed or unlicensed aggregation or factoring, (8) airlines, (9) age verification, (10) age restricted products or services, (11) bail bonds, (12) bankruptcy lawyers, (13) bidding fee auctions, (14) collection agencies, (15) chain letters, (16) check cashing, wire transfers or money orders, (17) counterfeit goods, (18) currency exchanges or dealers, (19) embassies, foreign consulates or other foreign governments, (20) firms selling business opportunities, investment opportunities, mortgage consulting or reduction, credit counseling, repair or protection or real estate purchases with no money down, (21) credit card and identity theft protection, (22) cruise lines, (23) essay mills, (24) flea markets, (25) drug paraphernalia, (26) extended warranties, (27) fortune tellers, (28) “get rich quick” schemes; (28) gambling (including but not limited to lotteries, Internet gaming, contests, sweepstakes, or offering of prizes as an inducement to purchase goods or services), (29) sports forecasting or odds making, (30) illegal products or services, (31) mail-order brides, (32) marijuana dispensaries and related businesses, (33) money transmitters or money service businesses, (34) multi-level marketing or pyramid schemes, (35) online or other non-face-to-face pharmacies or pharmacy referral services, (36) prepaid phone cards, phone services or cell phones, (37) pseudo pharmaceuticals, (38) quasi-cash or stored value, (39) securities brokers, (40) sexually-oriented or pornographic products or services, (41) shipping or forwarding brokers, (42) substances designed to mimic illegal drugs, (43) telemarketing, (44) telecommunications equipment and telephone sales, (45) timeshares, (46) travel agencies or travel clubs, (47) online or other non-face-to-face tobacco or e-cigarette sales, (48) weapons and munitions (49) virtual currency that can be monetized, re-sold or converted to physical or digital goods or services or otherwise exit the virtual world, (50) personal computer technical support, (51) selling video game or virtual world credits (unless you are the operator of the video game or virtual world), (52) selling social media activity, such as Twitter followers, Facebook likes or Youtube views, (53) human hair, fake hair or hair-extensions, (54) any product or service that infringes upon the copyright, trademark or trade secrets of any third party, or (55) any product, service or activity that is deceptive, unfair, predatory or prohibited by one or more Card Networks.

Well where's the fun in that?

Wednesday, May 22, 2013

The Copyrightability of Databases

Recently, a colleague asked me about the copyrightability of information in a database, specifically, in this instance, a phonebook. My colleague wanted to know if you could claim copyright over a database: this is a really important question, as the internet is, by and large, a gigantic database. This is actually two separate questions: 1. Are the contents of databases copyrightable? 2. Are there copyrightable elements of databases in and of themselves? So let's break it down and treat each separate.

Contents of Databases
We do know copyright does not apply to facts, and it would be an unfortunate circumstance if simply putting a fact in a database gave you copyright over that fact. The case that everyone learns in law school that expresses the copyrightable elements of compilations is Feist V. Rural Telephone Co. According to Wikipedia:
Feist Publications, Inc., v. Rural Telephone Service Co., 499 U.S. 340 (1991),[1] commonly called Feist v. Rural, is an important United States Supreme Court case establishing that information alone without a minimum of original creativity cannot be protected by copyright. In the case appealed, Feist had copied information from Rural'stelephone listings to include in its own, after Rural had refused to license the information. Rural sued for copyright infringement. The Court ruled that information contained in Rural's phone directory was not copyrightable and that therefore no infringement existed.
If Feist had literally distributed photocopies of Rural's telephone book, there would be a claim of copyright information. However, merely reproducing the information in a phone did not constitute copyright information. This assertion was largely supported by the decision in Bellsouth V. Donnelly, which basically stated that the selection, arrangement and coordination of a phonebook were the only copyrightable elements of the phonebook. Contrast this, however, to CCC Info Services v. Maclean Hunter Market Reports, where it was held that the valuations of automobiles in the "Redbook" constituted creative, judgment based content, and not simply merely factual reporting. Similarly, in CDN v. Kapes, the coin prices in a guidebook were found to be copyrightable because they were the result of expert judgment, and not just mathematically computed facts. So, when looking at the contents of databases, the question to ask regarding their copyrightability is, "Is this content merely a list of facts? Or is this content the result of a process of creativity or judgment?" If the answer to the former is yes, it is probably not protectable; if the answer to the latter is yes, the content is probably protected by copyright.

Copyright of Databases Themselves
We know that copyright explicitly covers compilations, i.e., that the creative elements involved in the organization of other works (layout, selection, etc.), are also protectable by copyright. A magazine, for instance, has many artistic and creative choices made in its organization and appearance. As does a compilation of selected works, or a series of short stories, photo essays, coffee table art books, etc.
     Importantly, however, databases are not like other creative compilations. A database, is a functional data structure: most of the 'layout' is done by algorithms, and much of the 'creative' choices made are made out of mathematical necessity. At first glance, then, it looks like we may be lead into the uncomfortable position where copyright can be extended over the form of databases themselves - which would be disastrous for the internet, because it means that you would be able to 'own' a data structure (i.e., listing names cross referenced by phone numbers or email addresses, etc.) simply by being the first to commit it to a tangible form.
     This turns out not to be the case, largely due to the idea/expression dichotomy, also called merger doctrine. This doctrine states that one cannot extend copyright protection over expressions that are 'merged' with their underlying ideas, concepts, natural laws, etc. To put it another way, you cannot use copyright to make a claim of ownership over functional elements or to get ownership of concepts. The courts have been recognizing increasingly that  databases in and of themselves are merged structures: they are mathematical, programmatic structures designed to allow for rapid manipulation of data in many forms, i.e., they are fundamentally merged. Or, as stated by the Copyright Office:
In summary, very few of the post-Feist compilation cases have held entire works to be uncopyrightable. In fact, copyrightability of the entire work is seldom even contested. Disputes tend to focus instead on the scope of protection. Consistent with Feist’s pronouncement that copyright affords compilations only “thin” protection, most of the post-Feist appellate cases have found wholesale takings from copyrightable compilations to be non-infringing. This trend is carrying through to district courts as well.(70)
      Translated into normal human, that means that the Courts have recognized that even copying big chunks of other people's databases, verbatim, rarely rises to the level of copyright infringement, so long as the information being copied itself is not subject to copyright protection. The arguments that get into court over databases mostly concern how much copying is allowed, or whether the underlying information itself is subject to copyright. As a result, as that (very lengthy) paper by the Copyright Office goes on to explain, database protection is mostly accomplished these days through a combination of contracts (ever wonder what all those "Click Here to Agree" terms of service agreements are for?) or with technological protection measures, i.e., DRM. So, if you are interested in protecting your databases, you should investigate your terms of service and your security measures.

In the end, the question about copyrightability of databases comes down to this: is the information in the database itself protectable by copyright? If the information in the database is the result of a sophisticated judgment or a creative process, then the answer is almost certainly yes. However, if the database consists of simple facts, or the output of deterministic formulae with no creative input, the answer is very likely no. Unlike artistic compilations, like magazines, photo collections, excerpted and collected works, etc., databases, though they may appear similar to compilations, do not typically receive the same protection of copyright law. As above, this due to the merger doctrine, because databases are functional constructs. So, unfortunately, there is no bright line rule dictating whether a database is per se copyrightable: it will always be a highly fact specific determination. The basic lesson, in the end, is largely consistent with copyright law in general: creative elements get copyright protection, whether those elements are visually creative layout of someone else's works or a series of numbers that resulted from a creative process.

When in doubt, it is probably best to ask your lawyer.

Tuesday, May 21, 2013

YCombinator and Rigged Roulette

YCombinator has been making a lot of headlines recently. I am a huge fan of their work, PG is the man,  and I think that they have a well earned reputation for being one of the most productive and successful incu-VC's out there. However, I have to play the bear a bit here, and point out that I think that YC is being overly mythologized. So, in no particular order, let's take a look at some interesting YC factoids.

     A few weeks ago, a piece ran in the NYTimes magazine by Nat Rich, which was very interesting, but I feel highlighted some inherent problems with YC, exemplified perfectly by this quote:

“There are two things that people grumble about Y Combinator that are actually compliments,” [PG] told me. “One is that Y.C. start-ups are overvalued. The only way for a company to be overvalued is if there’s someone willing to pay that price. So what they’re saying is: Going through Y.C. causes companies to raise money on better terms than they would have otherwise. We wouldn’t have the barefacedness to make that claim ourselves! The other thing they say is that they can’t tell on Demo Day which are the good start-ups. Well, it’s not because the good start-ups look bad; it’s because the bad start-ups look good! Which means we’re doing our job."
In case you missed it, that is PG basically stating that YC's job is to get overvalued investment for companies without much of a promising future. That isn't particularly great. 
     Now, let's combine two important facts: YC only accepts highly, highly qualified founders - importantly, a non-trivial percentage of all startups founded by young, qualified tech entrepreneurs apply to YC - and, according to PG "if ... you discover the next Google, you can increase your investment by 'a thousand X.'” So, to make an analogy, imagine that the YC investment pool is a roulette board - except that the payout for a win is several orders of magnitude greater than the bet, and the odds of any one number 'winning' are a lot higher than investment in a random company 
     Viewed in this light, it doesn't take a whole lot of skill to place a huge number of inexpensive chips on a rigged roulette board. Especially when you have thousands of talented individuals throwing themselves at you for a $11,000 + $3000n investment for 2-10% of your company†- which, by the way, is a tremendously favorable deal for YC. Additionally note that just two companies, AirBnb and Dropbox, make up the lion's share - ~75% - of YC's 10B portfolio, which consists ~400 companies. 
     Finally, in the context of startups generally, tech is actually not even the most fertile field for new companies. The substantial majority of successful startups are not in tech. They are in a wide variety of industries, with the two most successful categories being consumer discretionary and industrials. 
     When viewed in the light of all these facts, I think it should be easy to agree that, though YC is hugely successful and deserves recognition and praise for its accomplishments, it is being mythologized to an unnecessary degree. They are positioned at a bottle neck in an industry that happens to be very sexy right now, and, as a result, they are inevitably investors in a few truly major companies. However, that does not mean they are mystical seers with insight greater than those in in similar positions other industries that are less sexy. It just means that YC gets the most ink.
† Note that in Mr. Rich's article, he talks about several companies that received six figure investments from YC, and does so in a manner that makes this sort of investment appear routine. As far as I know, this is highly unusual for YC, and I would like to know more about how these companies got this funding from YC, or if, in fact, YC is now in the habit of investing more than the 11+3n detailed above.

Wednesday, May 15, 2013

Some Interesting Patent Statistics from 2012 via StrutPatent

StrutPatent has some really great patent statistics. Let's take a look at some of the more interesting numbers from 2012:
  • The top 10 companies receiving patents were all tech companies, and they received a total of 27,930 patents, or almost exactly 10% of all patents granted. 
  • The individual with most patents granted in 2012 is Kia Silverbrook. He received 220 patents. Thinking this through, assuming he takes no vacations, that is about 4.25 patents per week. Forgive me for saying so, but the idea that any one human could be that productive is truly an absurdity. It is just poppycock. 
  • The top 10 inventors of 2012 received a total of 1481 patents, an average of 2.85 patents per inventor per week. Which, again, is total insanity. 
  • Total patents granted in 1990 numbered 99,275, up to 244,513 in 2010, for a CAGR of 4.61%. 
  • There were 542,815 patent applications in 2012. Given that patent applications take several years, it is not easy to calculate what percentage of patents are granted, but it looks to be approximately the 50% range, and possibly higher, because many patent applications that were not granted are probably still pending in office actions, and may be granted in later years.
More patent statistics coming soon - we will get into just what percentage of patents actually do cover the pharmaceutical industry. Spoiler: a lot less than you may think.