According to today’s Wall Street Journal, the Securities and Exchange Commission (SEC) plans to move US accounting practices away from GAAP (Generally Accepted Accounting Principles).

Used widely in the US, GAAP is not an international standard. Firms outside of the US in over 100 countries use standards from the London-based IASB (International Accounting Standards Board) for their accounting, and compliance with IASB accounting rules is required for companies in the European Union.

The cost of moving US public companies to international accounting will undoubtedly be large. SEC Commissioner Troy Paredes said that the benefits of having public companies follow one set of accounting rules rather than multiple variations around the globe will be huge.

Corporate earnings as reported under international accounting standards will undoubtedly be different — some companies’ earnings will be higher, others will be lower. Tax consequences will particularly hit companies using LIFO (Last In, First Out) inventory accounting methods. LIFO accounting does not exist under international accounting standards. LIFO accounting is frequently used as a strategy by US companies to shield profits against taxation when inventory costs rise with inflation.

The change will involve a coordinated educational effort — existing accountants will need to be brought up to speed and be fluent with both systems. Students planning to enter financial services will need to be educated in both systems until the switchover is complete. Outside of international taxation programs, US colleges and universities do not currently teach international accounting standards.

The proposed SEC plan calls for large US companies to adopt the international standard in 2014, with small companies required to make the transition by 2016.

Kenneth Goldmann, the SEC practice director at independent accounting firm JH Cohn in Roseland, NJ, commented that the widespread global adoption of international accounting standards is gaining momentum: “I think we are going to have to change because the world is getting smaller and flatter.”

The SEC is currently seeking public comments on the proposed changes. Comments need to be submitted within the 60-day comment period.

Here are some of the questions being discussed:

• Is a license the entire contract, or is a license a subset of the entire contract, where the contract contains other terms and responsibilities? Does a license agreement continue if the license is terminated?
  

• Can a perpetual software license be terminated? If it can be terminated, what does the word ‘perpetual’ mean?

• What’s the difference, if any, between a ‘fully paid-up’ license and a ‘royalty-free’ license?

And my favorite questions of intellectual property law contract interpretation:

• Who is excluded by an “exclusive” software license? and What’s the difference, if any, between an exclusive license and a transfer of ownership? Is an exclusive license the same thing as “I promise not to license to anyone else?”
  

I’m going to write briefly about these last issues.

The term “exclusive license” frequently confuses many software companies licensing their software to multiple clients — and also frequently confuses clients of the software companies. Customers of software developers always want exclusive rights to everything being provided by a software consultant that didn’t come in a box off the shelf at Fry’s.

And sometimes software companies oblige them. Here’s the reasoning: “We won’t give this away to your competitors or anyone else — you will have an exclusive license agreement with us.” And in agreeing to this, the software company has just excluded itself from continuing to use what it thinks it has merely licensed to a single client and promised not to license to anyone else. (In many cases this can have the undesirable effect of putting the software developer in the status of an infringer by continuing to use portions of the materials it developed, in its work for its other clients.)

An exclusive license excludes the licensor
An exclusive software license excludes the licensor as well as the rest of the world. In other words, when the owner of rights in software gives an exclusive license to his customer in a software license agreement — the owner has just excluded himself from whatever rights he just gave to his customer.

To me, this use of “exclusive” is plain dictionary English and is not ambiguous (and this is where I differ from Professor Eric Goldman, who stated in his comments to the AdamsDrafting article that the meaning of “exclusive” can be ambiguous). It’s my professional opinion (and the opinion of many other software licensing attorneys) that “exclusive rights” has a special meaning in the context of a software license agreement and that the term refers to and reflects intellectual property law concepts of “exclusivity.”

All software contains intellectual property (although not all intellectual property in software is protected).

Some software is patentable or contains patents (most does not). All software is copyrightable. And apart from open source software, all software contains trade secrets. In a software license agreement, the ownership of these intellectual properties is not transferred to the customer — the use of them is licensed to the customer, on specific terms, requiring continuing compliance with the terms of the license, or the license will be terminated.

Both the US patent law and the US copyright law provide for the creator of rights (and subsequently any owner of the rights) to enjoy “exclusive” rights. In the copyright law context, the owner’s right to exclude others means that unauthorized use of the owner’s exclusive rights equals copyright infringement (except in the important case where the use is minimal enough to be protected by the law as “fair use” of the copyright). In the patent licensing world, inventors who intend to continue using their technology grant an exclusive license to their customer, but simultaneously reserve a right to use themselves. This type of license language is called a “grantback” clause. Particularly in the last case — a grant coupled with a grantback — it’s obvious that the granting back of a license to the creator is to explicitly avoid cutting off the creator’s rights in the intellectual property.

The law of mutual mistake
I see the “ambiguousness” of the word “exclusive” as a problem which is called “mutual mistake” in the law of contracts. Mutual mistake is a doctrine that says that a contract is void if the parties thought they had the same deal in mind, when actually the thing that was the subject of their agreement was not actually the thing they thought it was. Here’s a specific example that comes from a famous 19th century case:

Smith and Jones are farmers. Jones wants to buy a fertile cow, Rose, from Smith; and the price he is willing to pay reflects the fact that the cow is fertile. Jones and Smith make an agreement for Jones to sell Rose to Smith at the agreed-upon price. It turns out that the cow, Rose, is actually not fertile.

Both parties have made a ‘mutual’ mistake. The whole point of their agreement was the transfer of a fertile cow, not just the transfer of Rose the cow. Rose the cow turned out not to be a fertile cow. Jones would not have paid the price he paid, or agreed upon that price, for a non-fertile cow. The court found that this contract was voidable due to “mutual mistake.”

Similarly in the software development context — both the software developer and the software developer’s client may believe that an “exclusive” license only excludes everyone who is not a party to the software license agreement — in other words, that it does not exclude the software developer itself. But they use the terminology “exclusive agreement” or “exclusive software license” when what they really mean is “an exclusive license with a grantback license” or “an exclusive license where the licensor reserves rights to continue use” or more simply: “I promise not to license to anyone else.”

I’ve never seen a software license agreement considered by a court to be voidable for mutual mistake (technically, this is because this is specifically prevented by other language in most contracts which allows a court to rewrite the terms of the agreement to save the contract from being voided — sometimes called a “savings” clause or a “blue pencil” clause). Whether or not a savings clause exists, software developers who carelessly use the term “exclusive license” when they really intend to keep using the technology, are risking a court’s decision that the plain legal meaning of “exclusive license” excludes the licensor.

Careless license language and warranties of title
Now let’s extend this thought further down the line to the next set of adverse consequences.

Software development company ABC Inc. gives an “exclusive license” to their client XYZ Inc. for software developed and implemented at XYZ under the Software License Agreement between the parties. Both of them intend simply that ABC will not license this particular implementation of the software to anyone other than XYZ. However, the software license agreement doesn’t say that. Now ABC goes on to the next client and signs an agreement with FGH Inc. in which ABC “represents and warrants” that it has the ownership rights necessary to grant an exclusive license” to FGH (this is called a “warranty of title”), and the software being exclusively licensed by ABC to FGH includes the core development tools that ABC licensed to XYZ and which ABC uses in its development projects for every client.

ABC no longer has any rights to legally give away to FGH, because it transferred them all by contract to XYZ. In this case, ABC starts out from Day One in its software license agreement with FGH in breach of the contract — it is saying that it can give away rights that it does not have. If this contract lands in a court dispute, FGH will probably be able to get back every dollar paid to the software developer ABC.

“I promise not to license to anyone else”
Moral of the story: “I promise not to license this to anyone else” IS NOT the same thing as “I grant you an exclusive license.”

I get about two calls a month about contract interpretation from a software development company or a customer licensing custom developed software.

The person on the other end of the phone has typically picked up a form document called “License Agreement” from some place on the Internet like docstoc.com or has been handed a form prepared by a business attorney inexperienced in software development and intellectual property license terminology.

If questions are now being raised and a contract has already been negotiated — or signed — the answers to those questions are almost never good.

Software development is an expensive proposition: it’s worth spending 5 to 10 percent of the value of the contract (or if you are a developer, the fees from a couple of customer licenses) as “insurance” to make sure that the software license agreement says what the developer and customer think it does.

http://williampatry.blogspot.com/

Patry cites the “depressing state of copyright law” and the direction of recent copyright law developments as among his personal and professional reasons for not continuing the blog.

His contributions over the last several years to copyright scholarship from a private practice point of view have been valuable and unique and will be missed. Several of us are trying to persuade him to maintain his archive of over 800 thoughtful and incisive posts on key developments (which he has removed).

If anyone is inclined, he or she should add opinions to the comments section.

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According to Finjan’s May 2008 Malicious Page of the Month (free registration required), the vulnerable health data was accessible via compromised login information for healthcare systems using Citrix remote access software. Social Security Numbers (TINs - “tax ID numbers” for individuals) were accessible via a compromised IRS employee login.

In early May, Finjan reported on a different server being controlled by hackers that contained a 1.4GB cache of stolen data. Compromised data involved 571 log files from the US, 621 from Germany (DE), 322 from France (FR), 308 from India (IN), 232 from Great Britain (GB), 150 from Spain (ES), 86 from Canada (CA), 58 from Italy (IT), 46 from the Netherlands (NL), and 1,037 from Turkey (TR) and resulted in the company notifying 40 major international financial institutions and law enforcement agencies located in the US, Europe and India.

Are DMCA bots applying the ‘racial profiling’ equivalent of copyright law enforcement? I’m waiting to see if public rights advocates such as the EFF and ChillingEffects.org will begin to actively use the sanctions already present in Section 512(f) against wrongful and overreaching DMCA takedown demands as a strategic weapon against the shotgun effect of enforcement by “unmonitored” monitoring agents.  The courts have so far declined to impose penalty damages against most rights owners making technically defective claims (the case against Diebold for using the DMCA to suppress criticism of defects in voting machine software is one of the notable exceptions where large damages were awarded).  Carpet-bombing users with defective DMCA cease-and-desist demands is irresponsible and should expose the content industry to money damages for abusive DMCA claims.

A few of my clients this week reported receiving one or more phishing emails about the 2008 Economic Stimulus Payment from the US government. Then I received one myself this morning. (”Gee, how could the IRS possibly know I switched email addresses?” was my first thought.) Here’s the email I received:

Don’t click on the link.  Don’t click on the link.
The rule is worth repeating.  Practice safe Internet computing — don’t click on a link in an email seeming to come from your bank, eBay, PayPal, or your federal government about your “account details” or to “apply” for something. Go to the official site and do your business starting from there (or investigate or report the phishing email, from there).

The grammatical and formatting errors which allow users to identify phishing scams are becoming much more subtle as the phishes and the phishers themselves become more refined. Note to Phish-Dude: there are some big issues in your general approach here. It is generally a tip-off to us where the federal government uses an exclamation (”!”) point at the end of any communication. We’re just not that officially enthusiastic about anything here in the U.S. Also, while I personally consider the stimulus payment to be a kind of ‘moral refund’ for putting up with the last 8 years of government, the payment is technically not a refund, but a disbursement. (Readers are welcome to offer other grammar and spelling observations and feedback in the Comment section.)

Clicking through (don’t click on the link!) redirects the email recipient to the following page:

While you don’t have to, I frequently amuse myself by picking the IP address out of the email link (my email program, Thunderbird, allows me to right-click and copy a link). Phishing scam emails have URL links that almost always show an IP address rather than text, as this one did:

http://211.32.47.11:443/irs_redi/

When I went to DomainTools and did a reverse IP search on the 11.32.47.11 IP address, it came back “unknown”. Finally, I also note: Thunderbird and Firefox (my recommended email and web browser software of choice) both tried to warn me several times that the email and the website were a scam. Ignoring all of this “Danger, Danger, Will Robinson!” and directing yourself straight into harm’s way is possible, but much less likely with these than it is with other software.

Introducing the PHISHY: Arborlaw’s new annual award for phishing and other email scams
Is there an annual award for phishing campaigns? I couldn’t find one, so I’m announcing the Arborlaw PHISHY™ Award. You can document your submissions for the Best Phishing Attempt of 2008 in a comment here: Arborlaw 2008 PHISHY™ Awards — Submissions Page.

Submissions for the 2008 Arborlaw PHISHY™ Award will close on December 31, 2008.

Does the monitoring of cross-border communications by the United States government under the Patriot Act and the Wiretapping Act and the lack of US constitutional protection in foreign countries violate an attorney’s duty to keep client matters confidential?

Does outsourcing act as a waiver of the attorney-client privilege or otherwise permanently affect a client’s legal rights?

One law firm is concerned that the answer is ‘yes’ — and has sued the Bush administration for declaratory judgment and asked the District of Columbia and Maryland bars for ethics opinions on the matter. According to Newman McIntosh & Hennessey, US government interception of attorney-client communications is highly probable because the National Security Agency (NSA) is free to spy on foreign companies. The Newman firm filed the complaint and ethics opinion requests seeking guidance on whether outsourcing of legal services compromises constitutional rights — and wants the court to order law firms to disclose their use of outsourcing and foreign legal support to clients, and to order the US government to establish protocols to shield attorney-client information from US government surveillance.

The complaint and legal inquiry arose out of a solicitation to the Newman firm by Acumen Legal Services (India) Pvt., Ltd./Acumen Solutions, LLC (TX) to provide the law firm with outsourced litigation support. Hennessey, a named partner for the firm, is concerned that information from his personal injury and medical malpractice practice could fall into the hands of competitors who employ outsourced services, through the electronic discovery process. According to Hennessey:

It’s not paranoia. It’s just fact . . . . [N]ow that we’re outsourcing services, we have given no consideration to the ongoing practice of the government harvesting information out there.

Hennessey openly wonders whether explicit client consent should be required before any data is sent abroad.

Legal outsourcing has grown dramatically in the last decade as bandwidth has improved to easily handle large amounts of imaged data, facilitating remote document scanning and low-cost document review, primarily in India.

Here’s why this is a particularly interesting story to watch: A. large law firms are now relying heavily on the practice of outsourcing their legal document imaging and legal document review work to maintain their profit margins. B. The regulation of attorneys is almost entirely a matter of state law. I’m not aware of any federal controls over the attorney-client relationship or attorney-client privilege (except with regard to the recent encroachment on attorney-client communications in the representation of enemy combatants in connection with Guantanamo and Bush administration military tribunals).

The case has been assigned to District Judge Colleen Kollar-Kotelly (chief judge of the Foreign Intelligence Surveillance Court - although this is apparently not a FISA issue).

Tip of the hat to the Blog of Legal Times for breaking this story.