To find out more about how the Adler Law Group can help your business identify risk and issues related to intellectual property ownership, corporation or LLC formation, or just assess risk associated with your business, contact us for a free, no-obligation consultation by emailing David @ adler-law.com, visiting our web site www.adler-law.com, or calling toll free to (866) 734-2568.
The case of Clarity Software, LLC v. Financial Independence Group, LLC is a great example the serious, negative consequences to intellectual property ownership when business owners and legal counsel fail to ensure that tasks are completed.
The short version is that the creator of computer software, Vincent Heck, sold the copyright in his software to settle a debt to a creditor, Eric Wallace, who intended to form Clarity Software, LLC to own and distribute the software. The lawsuit was for infringement of the copyright in the software.
As they say, “the devil is in the details.” In this case, the detail that became a devil, and ultimately prevented Wallace from enforcing a copyright in the software, was the fact that Clarity Software, LLC was never properly formed and therefore lacked standing to sue for infringement.
Forgive me for employing yet another trite phrase, but “truth is often stranger than fiction.” The Defendant proved that a veritable comedy of errors had occurred resulting in no record of the formation, including 1) the Department of State of Pennsylvania losing the certificate of organization, along with all records of the submission and filing of the certificate of organization, 2) the Plaintiff’s bank (PNC Bank) losing its copy certificate of organization provided when Wallace opened a bank account (even though PNC Bank still had the signature card completed when the account was opened), and 3) Wallace, himself a former President of the Pennsylvania Institute of Certified Public Accountants, losing his copy of the certificate of organization and all records of his communications with his attorney.
Defendant successfully moved for summary judgment based on its argument that Plaintiff did not own the copyright at issue in the litigation since it was not properly organized as a Pennsylvania limited liability company and never acquired valid ownership of the copyright.
Hat tip to Pamela Chestek and her blog, Property Intangible, where she first wrote about this case October 13, 2014. The opinion and order can be found here: Clarity Software, LLC v. Financial Independence Group, LLC, No. 2:12-cv-1609-MRH (W.D. Pa. Sept. 30, 2014).
To find out more about how the Adler Law Group can help your business identify risk and issues related to intellectual property ownership, corporation or LLC formation, or just assess risk associated with your business, contact us for a free, no-obligation consultation by emailing David @ adler-law.com, visiting out web site www.adler-law.com, or calling toll free to (866) 734-2568..
One of the most important functions of a contract is to reduce uncertainties and mitigate risks. That is why almost all professional or personal services contracts contain “limitations of liability” provisions. Although they may seem like densely-worded, “boilerplate” provisions, and often overlooked, these provisions broadly affect a party’s ability to bring a claim, show liability, and prove damages that can be recovered.
A limitation of liability clause is a provision in a contract that limits the amount of exposure a company faces in the event a lawsuit is filed or another claim is made. As a preliminary observation, it is important to note that enforcement of limitation of liability provisions vary from state to state. The general rule in contract law is that in the commercial context, many states have found these clauses to be a mere shifting of the risk and enforce them as written.
Limitations of Liability generally address two areas of concern. First, the types of claims that may be barred. Second, the amount or scope of liability for claims that are not barred.
Limiting The Type Of Claim
A typical limitation of liability clause may look something like this:
“IN NO EVENT SHALL A PARTY OR ITS DIRECTORS, OFFICERS, EMPLOYEES, OR AGENTS, BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, INCLUDING BUT NOT LIMITED TO ANY DAMAGES FOR LOST PROFITS. IN NO EVENT SHALL THE TOTAL LIABILITY OF A PARTY EXCEED THE AMOUNTS PAID BY CLIENT, IF ANY, FOR THE SERVICES.”
This clause limits the types of damages that may be claimed, prohibiting claims for:
- Consequential damages (damages resulting naturally, but not necessarily, from the defendant’s wrongful conduct, BUT they must be foreseeable and directly traceable to the breach)
- Incidental damages (includes costs incurred in a reasonable effort, whether successful or not, to avoid loss, or in arranging or attempting to arrange a substitute transaction)
- Special damages (often treated the same as “consequential” by courts, “special” damages have been defined as those that arise from special circumstances known by the parties at the time the contract was made)
- Punitive damages (damages that may be awarded which compensate a party for the exceptional losses suffered due to egregious conduct; a way of punishing the wrongful conduct and/or preventing future, similar conduct)
- Exemplary damages (See “Punitive damages”)
- Indirect damages (See “Consequential damages”)
- Lost Profits (Cases in New York (and elsewhere) have a held that a clause excluding “consequential damages” may no longer be enough to bar “lost profits” claims; therefore, consider including more specific provisions in contracts- if parties want to exclude lost profits for breach of contract, a clause specifically excluding “lost profits” should be included.)
Lost profits that do not directly flow from a breach are consequential damages, and thus typically excluded by a limitation of liability clause like that above. But lost profits can be considered general damages (and thus recoverable) where the non-breaching party bargained for those profits, and where the profits are a direct and probable result of the breach.
Limiting The Amount Of The Claim
If found to be enforceable, a limitation of liability clause can “cap” the amount of potential damages to which a party is exposed. The limit may apply to all claims arising during the course of the contract, or it may apply only to certain types of claims. Limitation of liability clauses typically limit the liability to one of the following amounts: (i) the compensation and fees paid under the contract; (ii) an sum of money agreed in advance; (iii) available insurance coverage; or (iv) a combination of the above.
Parties can and typically do agree in their contract that liability is capped at some dollar amount. If liability exists and if damages can be proved, then the aggrieved party recovers those damages, but only up to the agreed cap. Sometimes these are mutual; other times they are one-sided. Sometimes the cap is a fixed sum (e.g., “the amounts paid for the services” or “$100,000”). Other times, the parties may choose to tie the cap to the type of harm, (e.g. personal injury, property damage, violations of confidentiality obligations).
However, sometimes that parties may agree that certain types of harm should not be limited. These “exceptions” put the parties in the same position they would have occupied if there was no limitation of liability provision in effect. For example:
- exposure for violations of intellectual property (copyright, trademark, trade secret, patent) or proprietary rights (right of publicity, right of privacy, contractually-defined proprietary information)
- in the event of an obligation to indemnity and defend for 1) breach of intellectual property representations, and/or 2) third party intellectual property or proprietary rights
- in the event of an obligation to indemnify because a party didn’t have the right to provide data or information
- in the event of an obligation to indemnify and defend for non-compliance with data security standards
- exposure for violations of confidentiality obligations
- personal injury or property damage due to negligent acts or omissions
Businesses that rely upon limitation of liability clauses should periodically reexamine those clauses. Questions that you should be asking include: “what’s my maximum recovery if the other party breaches,” and “what’s my maximum liability if I breach?”
These are only effective if enforceable, that’s why drafting is key. According to many courts, following certain drafting guidelines will help reduce the likelihood that a limitation of liability clause will not be enforced. Such guidelines include:
- Make the clause conspicuous: set the clause in bold face print or underline or otherwise place the clause apart from the rest of the text on the page on which it appears so that the other party is aware of its existence.
- Make the language clear and concise: make sure that the clause is concise and unambiguous as it relates to the contract as a whole.
- Identify specific risks: be specific in identifying the types of damages you think should be excluded.
- Negotiate the clause: discuss the clause with the party that is signing the agreement and negotiate if there is a discrepancy.
- Retain drafts of revisions: keep drafts of any revisions made to the limitation of liability clause so that you have proof that the clause was negotiated.
- Add language stating that these damages are not recoverable even if they were, or should have been, foreseeable or known by the breaching party.
- Recite that the limitation of liability clause is an agreed benefit of the bargain, and that it remains in effect even if any remedy under the contract fails of its essential purpose.
- Consider including a liquidated damages clause for specific breaches, which would replace a damages claim.
DISCLAIMER: THIS IS NOT LEGAL ADVICE. Please consult qualified attorney to discuss your specific situation.
If you are concerned about how to tighten your contracts, we may be able to help. We can review your contracts, your business practices, and advise on whether there is room for improvement.
Please contact us for a no-fee, no-obligation consultation. (866) 734-2568 David [at] adler-law.com
Technology Continues to Test The Bounds of Copyright Law
The Internet is an unprecedented source of disruption. From retail services (e.g. Amazon) to media and entertainment, almost every industry has been forced to rethink its business model due to the accessibility, ubiquity and democratizing force of the Internet. Aereo was positioned to disrupt the traditional media distribution model by giving consumers greater control over what were otherwise “free” over-the-air transmissions.
The Aereo service was premised on the idea that consumers should be able to watch and record over-the-air broadcast television programming via the Internet. Major broadcast networks that owned the content made accessible through Aereo challenged the model on the grounds that Aereo was violating the exclusive “public performance” right guaranteed by the Copyright Act.
Copyright law provides copyright owners six exclusive rights. One of those rights is the exclusive right to publicly perform the copyrighted work. Because this right is a statutory construct, one must look to the statute to determine its meaning. To “perform” and to perform “publicly” means “to transmit or otherwise communicate a performance or display the work to a place … or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”
While many reacted by asking whether the case would stifle innovation and have a chilling effect on start-ups, this case does highlight the increasing tension between technological advances and copyright law.
From a practical standpoint, one need not be alarmed about the impact of the decision on most types of innovation. For one thing, the Court went to some lengths to craft a reasonably narrow decision, which applies only to broadcast TV retransmitted over the Internet.
As with any type of innovation, there are different types of risk. On the one hand, there is technology risk: the risk that whatever technology is necessary for some business plan simply won’t work. On the other hand, there is legal risk, highlighted by the Aereo decision: the risk that the entrepreneur’s interpretation of some act or case law won’t ultimately prevail. That’s what happened to Aereo.
As an IP lawyer, I am somewhat perplexed. It is hard for me to understand why Aereo made such a bold move. However, at least the district court agreed with Aereo’s interpretation.
Do you work with start-up companies and need a basic understanding of the various intellectual property issues that can arise?
I will be co-presenting in this online seminar that will help you:
- understand the trademark and copyright problems your client may encounter with branding;
- learn how to protect your client’s branding once established;
- familiarize your practice with patents, including what they protect, timing, and strategies to prevent inadvertent loss of patent rights before filing the application;
- understand trade secrets and the importance of non-disclosure and confidentiality agreements;
- recognize intellectual property issues relating to technology, including open source code and the cloud;
- establish a proactive approach toward intellectual property ownership between cofounders, employees, and vendors; understand business names, domain names, promotional issues, and website content concerns.
The program qualifies for 1.5 hours MCLE credit.
I would like to personally invite you to attend the upcoming Law Ed program titled, “Identifying Intellectual Property Issues in Start-Ups,” which I will be co-presenting via live webcast on Tuesday, May 27th.
Presented by the ISBA Business Advice and Financial Planning Section
Co-Sponsored by the ISBA Intellectual Property Section
A presentation on what goes into creating original designs and how these differ from copycats.
WHERE: Decoration & Design Building, J. Robert Scott Showroom, Suite 220
WHEN: Wednesday, October 2,2013 !2 p.m.
WHAT: From film to fashion, creative industries are taking steps to protect and promote original work. Designers and manufacturers need to know what steps they can take to protect their designs, their businesses, and their profits. The discussion will address issues related to how to protect original design (copyright & design patent) and the manufacturers (trademark, unfair competition).
INTERIORS Magazine Editorial Director Michael Wollaeger
J. Robert Scott Founder Sally Sirkin Lewis
Designer Laura Kirar [Web Site]
Intellectual Property lawyer David Adler
Showroom reception to follow.
Download the full Fall Decoration & Design Building Market Brochure Here.
On October 2, 2013, I will be attending the Decoration & Design Building Fall Market where I am giving a presentatIon on protecting original furniture & textile designs. Those in attendance share a belief that style and design matter.
As designers and purveyors of good taste, you may spend months developing a concept, selecting materials, agonizing over the exact curve of the arm of a chair. Manufacturers may refine the design, invest in tooling to build it, promote it, and get it to market. Merchandise buyers may spend months reading, researching, attending events such as this to obtain and fill your showrooms and catalogue with ineffable elements of style. This is original, authentic design. Authentic designs—pieces produced by designers or their authorized manufacturers—are investments.
Therein lies the problem for today’s furniture designers and retailers. It takes intellectual and financial capital to conceive, create and produce good design. Yet, today’s consumer driven, price-focused economy is making it more and more difficult for a designer to protect and profit from the investment of this intellectual capital.
This presentation will focus on why certain designs are protectable, how to protect them, and how to defend against knock-offs.