LICENSING VERSUS SELLING YOUR SOFTWARE

Software, in particular, typically is equally amenable to licensing or sales models. In a word, control is typically the most compelling reason to license your IP rather than selling it. Freedom from ongoing duties to buyers is often a compelling reason to sell it. Video game makers, particularly those who make games for play on the Internet or otherwise among gaming “communities” seem increasingly have settled on the licensing model because they think it enables them to insure a level playing field for all of their customers. Inevitably, however, their customers feel, or at least want to feel that they own the software they purchased.

So what are the principal factors courts use to differentiate a license from a sale? Case law seems to be coalescing around three. Considering how one wants to address each may help individual IP owners decide whether licensing or selling works better for them.

The first seems obvious, what the agreement says. If it says it is a license, it more likely is.

The second is whether the IP owner significantly restricts users’ ability to transfer the software. In a recent Ninth Circuit case concerning the World of Warcraft game, the court held that restrictions prohibiting re-sale, restricting transfer to those who agreed to abide by the end user license agreement and requirements that the transferor delete all of its copies, evidenced a license rather than a sale.

The third is whether the IP owner imposes significant restrictions on the manner in which the software may be used. The court in the World of Warcraft case held that restrictions on the locations in which the software could be used , prohibitions on use with third-party software and reservation of a right to alter the game or suspend users evidenced a license.
 

A THREE STEP CHECKLIST TO AVOID NAKED TRADEMARK LICENSING

The threat of a trademark being deemed abandoned as a result of naked licensing sometimes seems more theoretical than practical. Trademark abandonment is a harsh remedy, subject to a high burden of proof for its proponent, and there are multiple ways to structure a trademark license such that the trademark licensor can “police” the licensee’s use of the trademark without thoroughly inspecting every licensed product. A recent case from the Ninth Circuit reminds us, however, that there are minimum standards that trademark licensors must meet.

The concept behind the prohibition on naked licensing is intuitive. If a trademark owner allows a licensee to use his trademark without ensuring that the licensed products meet the standards the trademark has come to symbolize in the minds of consumers, the trademark loses its symbolic value and we might as well allow anyone else to use it.

In FreecycleSunnyvale v. The Freecycle Network, the Ninth Circuit affirmed a decision that a non-profit recycling group (which one might think would make a sympathetic trademark owner) failed to do the minimum. The opinion suggests the following three step checklist for trademark licensors to follow when licensing their trademarks.

1. Put it in the contract – This seems obvious. There should be written license agreement that specifies the standards to be maintained. The license should say that the licensor has rights to either inspect or supervise to ensure that standards are maintained.

2. Do what you say – Whatever you say you are going to do, be it inspection or supervision, do it.

3. Prove you can trust the licensee – It is permissible to rely on the licensee to handle the day-to day, if there is a “close working relationship.” If you are going to do that, include in either the body of the contract or the “whereas” clauses, the basis of the close working relationship and reasons why the licensee can be trusted based on past history or mechanisms in place. Be sure to permit more extensive scrutiny if the relationship changes, and if the relationship does change, re-evaluate the measures in place to determine if more control is needed.

By doing those three things, trademark licensors stand a better chance of avoiding the harsh punishment of trademark abandonment.