Legal and Regulatory Issues in the Information Economy/Ideas Trade Secrets and Intellectual Property

In the information economy, the possession and safeguarding of ideas are of paramount importance. Ideas themselves are commodities in the information economy. Ideas also provide their owners the competitive edge in the information age. There-ore, it is necessary that a legal regime for the protection of ideas be put in place. The lack of such a legal system will not only stunt growth but also hinder prosperity in the information economy.

How is information used in the Internet?
Today, the Internet works basically by transmitting data and information between and within computer networks. Often, the data and information transmitted are compiled and collected by network administrators to establish a profile of the users. This profile will then be used to tailor-fit products and services for the customers, as well as predict their buying and spending patterns. There are also cases when the data collected are sold to or shared with other companies. These are often large corporations dependent on a revenue stream that consists, at least in part, of personal consumer data. Nearly every modern company in the world today uses personal information, at some level. However, some companies depend on this revenue stream more than others. Among the most well known companies that depend almost entirely on personal information are DoubleClick, which distributes online banner ads, and credit reporting companies such as Equifax and Experian.

It is also important to remember that trade in personal information was widespread long before the rise of the Internet. One of the first companies to discover the value of personal information was the Polk Company, founded in 1870. Polk’s first product was a directory of Michigan-based businesses, organized by railroad station. The idea was to make it easier for consumers who lived near one railroad station to shop near another. In the 20th century, Polk became the country’s leading purchaser of motor vehicle registration records. Polk used the records to contact car owners on behalf of the automotive industry in the event of a safety recall and made profits by combining the make and model of car with census information, and then selling this information to marketers who used it to determine lifestyle, income, and the likelihood of purchasing any given product.

Is information a property right?
Individuals instinctively regard personal information as their individual property and any use thereof without their knowledge and consent as equivalent to “identity theft.” Thus, one school of thought proposes that data or information, specifically personal information, be afforded a corresponding property right and protection so that its use may be granted appropriate monetary value.

This is fundamentally different from the legal architecture currently in place. At present, privacy is protected by a set of liability rules. A person who invades another’s privacy can be sued. If DoubleClick tracks consumers by installing cookies in their computer storage devices, and if enough consumers feel that their collective privacy has been violated, then DoubleClick may be involved in a class action lawsuit. A property regime, on the other hand, gives control and power to the individual holding the property right, and requires negotiation before transference. In a property regime, the rights holder negotiates a price; in a liability regime, a court does.

A property regime, though contentious, has become more and more appealing given the rampant misuse of personal information in the Web. Treating data as a property right and giving it adequate protection may help solve the problem of abuse. However, it may yet become a source of problems in the future.

What is a trade secret?
A trade secret is any formula, pattern, physical device, idea, process, compilation of information or other information that:


 * Provides the owner of the information with a competitive advantage in the marketplace; and
 * Is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, except through improper acquisition or theft.

In the physical world, trade secrets and ideas are revealed, copied by or sold to business rivals, leaving owners with a diminished competitive advantage. The same is true, and probably easier to do, in the Internet.

How are trade secrets compromised?
Trade secrets can be compromised either through outright theft of the information, or violation of a confidentiality agreement. The former constitutes industrial espionage, which may involve either the old “spy” paradigm or the newer paradigm of the computer hacker. In violations of confidentiality agreements, the obligation of confidentiality that has been breached may be an implied obligation, as with a company employee who is expected not to act against the interests of the company, or an explicit, contractual obligation signed between two companies.

Are there ways of protecting trade secrets?
To emphasize the need for confidentiality, and to ensure proof of the existence of such an obligation, it has become customary in most high tech companies to require employees to sign a confidentiality agreement.

A trade secret owner can enforce rights against someone who steals confidential information by asking a court to issue an order (called an injunction) preventing further disclosure. It can also collect damages for any economic injury suffered as a result of the trade secret’s improper acquisition and use.

An example of a trade secret violation suit involved Wal-Mart and Amazon.com. In October 1998, Wal-Mart filed suit in Arkansas against Amazon.com “to bring an immediate stop to what appears to be a wholesale raiding of its proprietary and highly confidential information systems by Amazon.com and others through the use of former Wal-Mart associates.” In dismissing the suit, the court said it should have been filed in Washington State, where Amazon is based.

In January 1999, Wal-Mart again sued Amazon.com and its protégé, Drugstore.com, but this time in a Washington state court. The lawsuit alleged that Amazon hired away 15 key Wal-Mart technology executives for their knowledge of its computerized retailing systems. Amazon’s chief information officer had served as vice president of information systems at Wal-Mart prior to being hired by Amazon in August 1997. In March 1999, Amazon filed a countersuit against Wal-Mart based “in part on unfair competition and intentional interference,” setting up a complex legal Web of lawsuits. The cases were not resolved by the courts as the parties reached a settlement agreement in April 1999.

How is ownership of a trade secret proven?
To prevail in a trade secret infringement suit, a trade secret owner must show that the information alleged to be confidential really is a trade secret. Again, a confidentiality agreement is usually the best way to do this. In addition, the trade secret owner must show that the information was either improperly acquired by the defendant (if the defendant is accused of making commercial use of the secret) or improperly disclosed-or is likely to be so-by the defendant (if the defendant is accused of leaking the information).

What if the secret is discovered within legal means?
However, people who discover the secret independently-that is, without using illegal means or violating agreements or state laws-cannot be stopped from using information protected under trade secret law. For example, it is not a violation of trade secret law to analyze (or “reverse engineer”) any lawfully obtained product and determine its trade secret.

Some software companies have intentionally revealed their trade secrets to reveal whatever flaws are in them and for other people to offer solutions to these flaws. For example, Netscape published its source code after Netscape discovered that the program had security flaws that could be exploited by hackers or crackers. Netscape developers hoped that by revealing and posting the source code, other software developers can scrutinize it, find out the glitch, and provide patches that Netscape users can then download for free.

What are business method patents?
Business method patents are part of a family of patents known as utility patents that protect inventions, chemical formulas, and other discoveries. A business method is classified as a process because it is not a physical object like a mechanical invention or chemical composition.

In July 1998, a federal court ruled that patent laws were intended to protect any method, whether or not it required the aid of a computer, so long as it produced a “useful, concrete and tangible result.”

Some examples of business method patents are:


 * Amazon.com’s famous “1-click” patent (U.S. Patent No. 5,960,411) issued September 28, 1999, is directed to a system and method for placing an order to purchase an item via the Internet. The patent is essentially directed to a methodology whereby information associated with a user is pre-stored by a Web site, and the user may thereafter order items from it with only one click of the mouse on a link associated with the item.
 * Priceline “Reverse Auction” Patent (U.S. No. 5,794,207), for a “method and apparatus for a cryptographically assisted commercial network system designed to facilitate buyer-driven conditional purchase offers.” In October 1999, priceline.com sued Microsoft, accusing Microsoft’s Hotel Price Matcher of infringing its U.S. Patent No. 5,794,207 for reverse auctioning.
 * DoubleClick Banner Ad Patent (U.S. No. 5,948,061), for a “method of delivery, targeting, and measuring advertising over networks.” In November 1999, DoubleClick filed a suit against L90 Inc. in the Eastern District of Virginia for its method of delivering advertising on the Internet.
 * Open Market Electronic Shopping Cart Patent (U.S. No. 5,715,314) for a “network sales system.”

Business method patents can be used effectively against a major competitor. For example, in December 1999 Amazon.com successfully stopped BarnesandNoble.com from using a one-click shopping system and forced it to adopt a more complicated ordering system.

What are the requirements for acquiring a patent?
The US courts have since mandated that the Patent Office grant patents on business methods that satisfy the three-pronged test for patentability. That is, the invention must be:


 * 1) Useful. A business need only demonstrate that its method or software provides some concrete tangible result. For example, the Amazon 1-Click patent provides a tangible result-an expedited purchase.
 * 2) New. The method or software must be novel. This means it must have an aspect that is different in some way from all previous knowledge and inventions.
 * 3) Non-obvious. The method or software must be non-obvious, meaning that someone who has ordinary skill in the specific technology cannot easily think of it. For example: An economist devised a method of avoiding taxes by using a credit card to borrow money from a 40l(k) fund. The method did not exist previously and differed substantially from previous methods of avoiding taxes. Since the method was new and was not obvious to accountants or tax experts, the economist acquired a patent for it (U.S. Pat. No. 5,206,803).

What is the impact of the Internet on intellectual property?
The borderless character of the Internet, particularly electronic commerce, raises questions regarding the continued applicability of traditional legal systems in the enforcement of intellectual property laws. As discussed previously, traditional legal systems are based on notions of sovereignty and territoriality. In contrast, the Internet largely ignores distinctions based on territorial borders. Thus, the Internet has been described as “the world’s biggest copy machine.”

Given the capabilities and characteristics of digital network technologies, electronic commerce can have a tremendous impact on the system of copyright and related rights, and the scope of copyright and related rights in turn can have an effect on how electronic commerce will evolve. If legal rules are not set and applied appropriately, digital technology has the potential to undermine the basic tenets of copyright and related rights. In the Internet, one can make an unlimited number of copies of programs, music, art, books and movies virtually instantaneously, and without a perceptible degradation of quality. In fact, there is practically no difference between the original and the copy. And the copies can be transmitted to locations around the world in a matter of minutes. The result could be a disruption of traditional markets for these works.

How vulnerable is digital work to copyright infringement?
The digitalization of copyrighted works has made them more vulnerable to piracy. Because they hardly cost anything, downloading and pirating just about any available software, electronic books, or music from the convenience of one’s home computer is often irresistible.

This is cause for concern because e-commerce often involves the sale and licensing of intellectual property, and its full potential will not be realized if intellectual property products are not effectively safeguarded. Content providers and other owners of intellectual property rights will not put their interests at risk unless appropriate regimes-at the international and national levels-are in place to guarantee the terms and conditions under which their works are made available.

The music and movie industry has initiated copyright infringement actions against the use of mp3, a compression technology, which compresses music so it may not be as bulky to download. Aside from its successful action against Napster, a recent decision barred a site (2600.com) from distributing software to de-scramble DVD codes. In the latter case, a suit was filed against 2600.com centering on the site’s practice of posting software that de-scrambles the code meant to prevent DVDs from being copied and linking to more than 500 other sites worldwide that make similar software available. The judge ruled against 2600.com, saying that “the plaintiffs have been gravely injured because the use of the program threatens to reduce the studio’s revenue from the sale and rental of DVDs and thwarts new, potentially lucrative initiatives for the distribution of motion pictures in digital form, such as video-on-demand via the Internet.”

In May 2002, Audiogalaxy.com, a Napster-like clone that has facilitated and encouraged the unauthorized trading of millions of copyrighted songs, was taken to court by the Recording Industry Association of America (RIAA) and the National Music Publishers Association, Inc. (NMPA) for wholesale copyright infringement. Less than a month after the lawsuit, Audiogalaxy.com settled and agreed to a “filter-in” system that requires the consent of the songwriter, publisher and/or recording company before a song can be shared over the Internet.

The music and movie industry have since brought lawsuits against several other similar companies, including Kazaa BV, Grokster Ltd. and Streamcast Networks Inc.

What is “copyleft”?
Copyleft is “a copyright notice that permits unrestricted redistribution and modification, provided that all copies and derivatives retain the same permissions.” Copyleft is a method for making a program “free software”. Free software allows the user to run, copy, distribute, study, change or improve the software. Accordingly, it gives the user the freedom to: (1) run the program for any purpose; (2) study how the program works and makes it conform to the user’s needs; (3) redistribute copies to other users; and (4) improve the program and release such improvements to the public.

What is “GPL”?
GPL stands for General Public License. While licenses for most software prohibit sharing and program alteration, a GPL software gives the user the freedom to share and change it. Under a GPL, the user is free to receive or request the source code, change the program or use such program, or portions of it, into an improved or altogether new free software. A GPL software, however, is subject to the condition that the enjoyment of the right to share and change is passed on to subsequent recipients or users.

What are the key issues in intellectual property rights protection in the Internet?
The most fundamental issue is the determination of the scope of protection in the digital environment-that is, how rights are defined, and what exceptions and limitations are permitted. Other important issues include how rights are enforced and administered in this environment; who in the chain of dissemination of infringing material can be held legally responsible for the infringement; and questions of jurisdiction and applicable law.

Are there international initiatives to protect intellectual property in the Internet? What Internet-specific treaties are in place?
The World Intellectual Property Organization (WIPO), through its 179 member States, has assumed responsibility for the formulation of a legal and policy framework at the international level to encourage the creation and protection of intellectual property. Its ultimate goal is to achieve an appropriate balance in the law, providing strong and effective rights, but within reasonable limits and with fair exceptions. Since trade in copyrighted works, performances and phonograms has become a major element of global electronic commerce, rights-holders should be legally secured in their ability to sell and license their property over the Internet subject to appropriate limitations and exceptions to safeguard public interest uses.

WIPO administers international treaties dealing with different aspects of intellectual property protection.

Under the Berne Convention, the most important international copyright convention, copyright protection covers all “literary and artistic works.” This term encompasses diverse forms of creativity, such as writings, both fiction and non-fiction, including scientific and technical texts and computer programs; databases that are original due to the selection or arrangement of their contents; musical works; audiovisual works; works of fine art, including drawings and paintings; and photographs. Related rights protect the contributions of others who add value to the presentation of literary and artistic works to the public, namely, performing artists, such as actors, dancers, singers and musicians; the producers of phonograms, including CDs; and broadcasting organizations.

Likewise, in 1996 WIPO concluded two treaties: the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT). Commonly referred to as the “Internet treaties”, these seek to address the issues of the definition and scope of rights in the digital environment, and some of the challenges of online enforcement and licensing. The WCT and the WPPT also clarify the extent of rightsholders’ control when works, performances and phonograms are made available to the public for downloading or access on the Internet. This type of transmission differs from broadcasting, in that the material is not selected and delivered by an active transmitter like a broadcaster to a group of passive recipients. Rather, it is transmitted interactively, that is, on demand from the individual users, at a time and place of their choosing. The treaties require that an exclusive right be granted to control such acts of “making available”, while leaving it to individual countries to decide how to classify this right under national law.

The treaties came into effect in March and May 2002, respectively. The provisions of both treaties were adopted by consensus by more than 100 countries, and thus represent broad international agreement regarding the appropriate approach to copyright in the digital environment. They are useful today as a guide and as a model for national legislation. In order for the treaties to be truly effective in cyberspace, they must become widely adopted in countries around the world. WIPO is therefore devoting substantial resources to promoting the treaties and to offering advice to governments on their implementation and ratification.

Why is there a need for such initiatives?
Issues of enforcement and licensing are not new, but they take on added dimensions and urgency when works are exploited on digital networks. In order for legal protection to become meaningful, rights-holders must be able to detect and stop the dissemination of unauthorized digital copies, which is accomplished at levels of speed, accuracy, volume and distance that in the past were unimaginable. In addition, for electronic commerce to develop to its full potential, workable systems of online licensing in which consumers can have confidence must evolve.