Silicon Valley Media Law Blog

Something truly wonderful happened while I was taking my blogging break -- about the same time my partner Yokum Taku filled the void with his new Start-Up Company Lawyer blog. 

It's a terrific resource about start-up company issues and has some tutorials on corporate and venture finance issues -- recent topics include first offer rights, lock-ups and registration rights -- also here, here,and here.

Yokum adds a new and seasoned voice to the terrific commentary we have over at Brad Feld's and Allen Morgan's blogs on these subjects for entrepreneurs.

Yokum and I work together on some media companies, as per Yokum's key credentials noted on his blog:  "I watch more television than most people I know and I am working on my Madden 2007 skills on the Playstation 3." 

We will have to have an office conference about the new mobile game recommendations over at GigaOM, which includes one that maybe I actually have a chance of beating my teenage son at, Phoenix Wright, Ace Attorney.

The National Venture Capital Association, in conjunction with IBF Conferences, held a webcast briefing (archived, available with fee registration) yesterday about what VC's have at stake in the patent reform process that is underway. The webcast featured remarks by Hank Barry, Josh Lerner, and Tom Walker, as well as background on the patent reform movement and a roundtable moderated by Karl Renner.

Karl Renner, of Fish & Richardson, cited a crisis at the PTO in terms of backlog and patent quality, as well as a crisis in the courts in terms of abusive patent practices, so-called patent "trolls" and skyrocketing litigation costs. With respect to patent reform, he predicts that nothing will be passed this year, and that curbing of injunctive relief will be the biggest issue. Other issues with scope of patent rights include an epidemic of business method patents, as well as case law holding that all relevant conduct to prove infringement need not occur in the US.

Hank Barry, of Hummer Winblad Venture Partners, discussed the growth in patent and copyright protection, and the concomitant increase in litigation. He also distinguished between theory and reality in terms of the importance of IP to early stage companies. The theory is that IP can clear the market and contribute strongly to company value. The reality is that it varies by industry, it can be a large money and resource sink, and IP can add value in an acquisition context, but in general is a big factor in a company's success only occasionally.

Harvard Business School professor Josh Learner, who is co-author with Adam Jaffe of Innovation and its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do about It, provided analysis about the sharp increase in patent protection and litigation. From 1900 to 2000, the level of US patent applications have increased from around 50,000 to over 350,000. Litigation has increased five-fold, and verdicts in favor of the patent holder have gone from the 30-40% range now to the 50-60% range. Notably, jury trials have gone from around 5% in 1950 to around 70% today.

Tom Walker, of Cardinal Development Capital Fund, talked about how investors desire increased certainty in connection with IP -- in terms of assessing the value of an IP investment, and of obtaining and maintaining IP protection. He noted the increasing importance of IP to VC investors, that on the upside IP can be a barrier to entry and on the downside can provide a means to recover value.

A recent California state appeals court decision reminds us that investor liability can arise based on various types of tort claims, in addition to the widely-publicized infringement claims. In Woods v. Fox Broadcasting Sub., Inc., Download file, the court held that a shareholder can be liable for tortious interference with contract and prospective economic advantage based on its influence over the dealings of the company in which it has invested.

Fox was a 49.5% owner of Fox Family Worldwide Inc., a joint venture with Haim Saban of "Power Rangers" fame. The venture was sold to Disney in 2001 for $5.3 billion. The sales price reflected a $400 million discount because Disney agreed to assume Fox's contractual obligations to carry cable broadcasts of Major League Baseball games, which were valued at a $600 million loss.

Two individuals who were each entitled to 1% of the sales proceeds based on stock option rights sued Fox, on the grounds that Fox engineered the deal to result in the price reduction that reduced their proceeds by $4 million each. They also alleged that Fox knew of their rights and intentionally structured the deal to interfere with them.

A recent law review comment takes a law and economics approach to the topic of "tertiary" copyright liability, also known as "investor liability." The comment, written by University of Chicago law student Benjamin Glatstein, argues that liability should be imposed on venture investors because it would yield efficiency gains, by placing the burden of preventing infringement on parties able to do so with the lowest relative cost.

Glatstein also looks at the social costs of imposing tertiary liability, including the fact that increased legal risk would have a chilling effect on investments: "Some investments on the margin, which might have been socially beneficial, will not be funded because of the additional transaction costs and risk."

He notes that "the costs, both monitoring and litigation, may be substantial. On balance, it is not obvious that we would be better off with tertiary liability if the tertiary party is not able cheaply to detect and deter infringement." This seems like a sober conclusion. But then he opines that it will be "relatively easy" for investors to reduce risk, for example, through the use of declaratory judgment proceedings, in which a start-up company would need to go to court to get an advance ruling regarding infringement as a condition to receiving a venture capital investment.

This may reflect the limitations of a theoretical approach that is not in step with the realities of venture investing. More likely would be the use of due diligence, product design reviews and/or legal opinions, and the structuring of investment relationships in some circumstances to minimize an active role, such as by taking observer seats rather than active board seats.

While we doubt that investors can easily internalize the costs of preventing infringement, especially through tools such as declaratory relief, the author is to be commended for a thoughtful treatment of difficult subject matter. He makes the point that the test for infringement must not "cast too wide or uncertain a net" in order to keep tertiary liability within socially beneficial bounds. The comment is entitled "Tertiary Copyright Liability"; the citation is 71 U. Chi. L. Rev. 1605 (Fall 2004) and available on Lexis or Westlaw or from the University of Chicago Law Review.

In a recent case, eBay was held not to have induced patent infringement merely because it had invested and taken an observer seat.

Jeff Clavier has an interesting piece on FeedBurner's $7 million second round. This is also written up by Matt Marshall of SiliconBeat who has the word on their competitors.

Mobius Venture Capital was the lead investor. Also participating were new investor Sutter Hill Ventures and existing investors Portage Venture Partners and Draper Fisher Jurvetson. The FeedBurner team, based in Chicago, includes Dick Costolo, Eric Lunt, Steve Olechowski, and Matt Shobe. They created the alert service Spyonit.com back in 1999.

FeedBurner is an RSS/Atom post-processing service that enables web publishers to enhance their feeds. They are also conducting trials in connection with monetizing content through syndicating feeds with advertisements. Besides the technology itself, it gets interesting when you start talking about differentiating between free services and ad-based and premium offerings.

Content syndication and ad sales representative arrangements are standard industry tools that could make sense assuming the medium accepts it. The FeedBurner blog notes in this regard: "It's important to us that we proceed carefully and in a manner that's extensible and considerate of the different ways in which the market may evolve."

Delivery Agent, Inc. has closed on $5.5 million in Series A funding through Worldview Technology Partners and Cardinal Venture Capital. The company describes itself as the leader in "shopping-enabled entertainment." Delivery Agent is an interactive commerce provider for the entertainment industry that enables viewers to purchase product placements in entertainment content. Mike Fitzsimmons is CEO. VCs on the deal were Chris Hadsell of Cardinal and Pete Goettner of Worldview.

The company's patent-pending Just Seen On™ technology allows production companies to digitally catalog product information at the production level. At the consumer level, the Just Seen On platform enables viewers to search for and purchase products that they see on screen. The company has commerce agreements in place with top television and cable networks, and its solution is seen as a potential cure for the rampant ad-skipping that is plaguing television advertising.

The Federal Circuit Court of Appeals has shed some light on the doctrine of inducement of patent infringement in connection with venture investments. In MercExchange v. eBay, Download file, the Court overturned a lower court ruling that had held eBay liable for inducing infringement by ReturnBuy, a company in which eBay had invested and had a commercial relationship. This ruling is timely because of the concern about investor liability for intellectual property infringement and because of the debate over inducement liability in the copyright law.

MercExchange asserted that eBay should be liable as an inducer on the basis that it had made a $2 million investment in ReturnBuy, that eBay had observer rights in the company, that eBay granted the company the right to post goods in volume on eBay, that eBay was the "primary venue" for the company's sales, and that eBay had provided engineering support to enable the postings on eBay. The Court held that these facts were not a sufficient basis for inducement liability.

Sling Media of San Mateo raised 10.5 million in a first round led by DCM --Doll Capital Management and Mobius Venture Capital. David Chao of DCM and Ryan McIntyre of Mobius join as board members. CEO is Blake Krikorian, ex-Philips Mobile Computing. Their play is "place-shifting" of television content. This appears to be along the lines of "time-shifting" that we saw first with VCRs and "space-shifting" with the Rio and other personal music players.

SkyMobileMedia of San Diego raised $6.25 million in a first round led by Enterprise Partners Venture Capital of La Jolla. CEO is Richard Sfeir, ex-TI, IBM. The company provides its SKY-MAP wireless applications software platforms for the handset industry.