Intellectual property law, particularly in the areas of software and electronic commerce, continues to undergo significant change. Intellectual property protection is influenced by the rapid evolution of technology, along with court decisions and legislative action to develop new laws to keep pace with these rapid technological advances. International laws and treaties are also a significant influence. To promote standardization in intellectual property laws throughout the world, the United States has signed treaties that require major changes in our laws. But perhaps the greatest influence on intellectual property law is the recognition by businesses of the value of their intellectual property and their aggressive efforts to protect their ideas in the global marketplace using all means available, including patents, trademarks, trade secrets and copyrights.

SOFTWARE PATENTS

In the software area, the State Street Bank & Trust Co. v. Signature Financial Group, Inc. (149 F. 3d 1368 (Fed. Cir. 1998)) case decided in July 1998 is an important decision regarding the patentability of software. Based on that decision, almost any software program now qualifies for patent protection so long as the software produces a "useful, concrete and tangible result." This is a major change and continues the evolution of the law of software patents.

Previously, no patents for software programs were allowed unless the program resulted in some physical transformation or physical activity outside the computer. For example, a computerized competitive bidding system was not patentable because there was no transformation or physical activity outside the computer. The State Street decision changes these rules.

In State Street, the software program in question was a program for mutual funds to pool assets into a larger investment portfolio of funds. By pooling the assets, the software program allows the bank to achieve cost savings in administering the mutual funds and also gain tax advantages. A lower court found that the program was just solving a mathematical algorithm without any physical transformation occurring outside the computer, and was therefore not subject matter covered by patents. The appeals court disagreed, saying that the program is a practical application of a mathematical algorithm and produces a "useful, concrete and tangible result." In the same decision, the court also retired the business method exception for patents.

Prior to this decision, banking and financial software programs had been excluded from patent protection because they were considered methods of doing business. Because the court said it doesn't matter if the computer program does business or something else so long as it is useful, State Street opens up the possibility of software patent protection for computer programs used in financial, banking and insurance industries. Keep in mind, however, that being eligible for patent protection doesn't mean that a patent will be granted. The computer program must still meet other requirements, including being novel and not obvious.

The affect of State Street extends beyond the financial and insurance industries and may ultimately effect how software patent applications are written. It should no longer be necessary to write the claims of a software application in a way that focuses on a physically-oriented transformation. Now any computer-implemented mathematical algorithm that performs a useful and practical function is eligible for patent protection.

SOFTWARE LICENSES

Changes in the Uniform Commercial Code (UCC) Article 2B will have major implications for all technology licensing of software and will potentially impact most electronic commerce transactions. Given that software programs (and therefore software licenses) are used by just about every business in the American economy, almost every company in the United States will be affected by these changes. The changes will also effect every consumer who uses software on a home computer and every Internet user.

The UCC is a uniform body of law regulating business transactions throughout the United States. Article 2, in general, is a set of rules dealing with transactions in goods, usually the sale of goods. UCC Article 2B is a proposed new article that deals with licenses of information and software contracts. It originally focused on copyright licenses, but now covers just about every type of agreement related to software and all information under a license regardless of its media or form. Article 2B was moving toward final approval in 1999 and adoption by the states in the year 2000 but is currently stalled by opposition from some business segments and consumer groups. It is intended to create a uniform body of law for all software transactions, including mass-market retail software transactions that include standard license contracts such as shrink-wrap and click-wrap licenses.

A shrink wrap license is a license on the outside or inside of a software package. A click-wrap license is a license that appears on your computer screen that requires you to click on or accept the license terms before the software program is loaded on your computer for the first time. Article 2B validates these types of mass-market licenses and provides a new framework to evaluate these standard form contracts and their fairness. One of the objections to these licenses is that the consumer lacks the opportunity to modify the terms of the agreement and may not even know the terms of the agreement at the time the software is purchased.

In an attempt to overcome criticism that Article 2B is anti-consumer, the software user has a right to a refund of the purchase price and incidental damages such as shipping, if the user does not have an opportunity to review the mass market license before being obligated to pay and subsequently objects to the terms of the license. Even without Article 2B, courts have begun to uphold the enforceability of mass-market licenses, especially if the agreement contains a right of refund if the purchaser opts to reject the license and return the software.

By also validating automated transactions using electronic agents, Article 2B should have an important influence on electronic commerce. An electronic agent is a computer program that acts as a negotiating agent of the buyer or seller. For example, a computer program could be written to periodically check the price of flowers on a wholesale floral Web site and automatically order and buy the flowers on the Internet if the price of is less than or equal to a certain amount. Article 2B would enforce this type of contract, even though no individual was immediately aware of the contract or reviewed the act at the moment that the order was placed. The article includes protections for consumers who may erroneously place an order using electronic agents.

Under Article 2B, there may be a conflict between the terms of the mass-market license and other rights, particularly First Amendment and intellectual property rights. For example, unless a software product is covered by a patent, reverse engineering of the product is allowed under federal intellectual property law. However, many mass-market licenses prohibit reverse engineering even if the product is not protected by a patent. Under the UCC Article 2B, it appears that these restrictions would be enforced. Some licenses even prohibit public criticism of a software product - which conflicts with First Amendment free speech rights. It is rather doubtful that a court would uphold this type of restriction.

In general, UCC Article 2B attempts to strike a balance between the need for businesses to be certain of their liabilities in distributing mass-market software and the need to protect consumers. However, current objections to the article include charges that it is too broad and tries to govern all transactions in information with a single set of rules for all types of intellectual property. This may result in revisions to Article 2B that returns it to its original focus on licenses relating only to the copyright industry. Even with a more narrow focus, Article 2B will still greatly impact software licensing and electronic commerce.

COPYRIGHT LAW

The Copyright Term Extension Act, passed by Congress in October 1998 to implement two World Intellectual Property Organization (WIPO) Treaties, extends existing United States copyright terms by twenty years to bring them into line with recent extensions enacted in the European Union. The Digital Millennium Copyright Act, passed in the same month, also implements other portions of WIPO treaties. It expands copyright protection for online works, including music, software, movies and literary works. It limits copyright liability for online service providers who unknowingly transmit copyrighted works. They are not liable for copyright violations if they made no profit or didn't know the transmission occurred. Copying of software during computer maintenance is also specifically allowed. It also requires those transmitting junk e-mail to include information on how to unsubscribe and requires a return e-mail address in the message.

Another change that results from WIPO treaties is protection for databases. This is a substantial change since database contents are given minimal protection under copyright law. The bill protects databases from misappropriation if taken for commercial gain under a theory of unfair competition. The bill provides penalties for any person who extracts or uses all or a substantial portion of a database that has been gathered, organized or maintained by another through investment of substantial monetary or other resources. Such database protection may conflict with copyright law, so this legislation may not withstand a court challenge.

DOMAIN NAMES

Beyond the scenes, the domain name system is undergoing change. As of September 30, 1998, Network Solutions, Inc. (NSI) lost its exclusive right to register domain names. A nonprofit organization is to be established to control the overall domain name system in the United States and will take over from the current controlling body, the Internet Assigned Numbers Authority (IANA). NSI and IANA originally presented different plans for the charter of the nonprofit organization, but recently have agreed on a joint proposal. Among the duties of this nonprofit will be to decide on what new top level domain names will be added (five additions now are proposed), how trademark and domain name disputes will be resolved, whether the domain names should be held in a single registry, and how competition in registering domain names will be handled.

These are just a few of the latest major developments in intellectual property law that directly affect software development and electronic commerce. Software intellectual property laws are changing almost as rapidly as the technology itself. As the law continues to evolve, being aware of new developments in intellectual property protection is critical to adequately protecting your software business.