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Maybe the “i” in intellectual property should be lower case, as in iNtellectual property. Last fall, in this column, I wrote about the YouTube phenomenon. In most cases, however, the problems relating to infringement of IP rights on YouTube are pretty clear-cut. The company (now owned by Google) primarily bears the onus of policing what is uploaded and downloaded on its site. And, clearly, some people made a lot of money as a result of Web site visitors watching a variety of videos. As Apple Inc. just announced record quarterly profits of $770 million, the iTunes world created by Apple, through its iPod portable music player and iTunes online music store, offers a different and ultimately more successful legal answer to regulating and protecting legitimate business interests in intellectual property. For IP practitioners, it requires a deep understanding of technologies, of foreign trade and international law, the interrelationship between patents, trademarks and copyrights, and the ability to see past the products, technologies and businesses of tomorrow. Earlier this month, Apple announced that it had sold its 100 millionth iPod. By comparison, it took Sony Corp.’s Walkman – the pioneering portable music player – 14 years to duplicate that feat. In a few short years, Apple’s iTunes store has sold more than 2.5 billion songs, 50 million television shows and 1.3 million movies. A 2004 case study conducted by the Berkman Center for Internet and Society at Harvard Law School suggests that online music services could maintain the same business model from country to country thanks in large part to the harmonization of international copyright law. The iTunes world discussed in this article offers a road map for technology companies looking to introduce the next big thing, and offers a potential glimpse of the future of intellectual property. Impact The Berkman case study confirmed that iTunes has already impacted most of us either directly or indirectly. For consumers, the shift of the legal and regulatory balances in favor of copyright holders’ interests, and vice versa, has come at the expense of users’ freedom. I would argue that this shift is nothing more than law enforcement catching up with technology. Even so, consumers have received something in return. They can purchase a song for 99 cents instead of being forced to spend $10 to $20 on an album that may have only one or two songs that they want. For music labels, it is a mixed bag. Online music stores no longer need to compete with the free model of the old Napster. Stronger interfaces, permissive digital rights management (DRM) schemes, low prices and numerous features that the Internet world allows should provide greater opportunities for more brands. A download is also substantially less expensive than traditional distribution channels. However, as recently reported by the Wall Street Journal, CD sales have plummeted 20 percent compared to the same period last year, and the sales of online digital music have not made up for that revenue shortfall. There is an ongoing debate in the music industry whether the drop in sales is attributable to the availability of online music. For artists, it is still difficult to say. You would think that the functionality of Web-based systems would help lesser-known artists get found. Sales figures suggest that 95 percent of songs in the iTunes catalog have been downloaded at least once. Convergence The success of iTunes exemplifies the continuation of an international trend toward convergence on many of the basic principles in copyright, contract and anticircumvention laws. License agreements covering terms of service govern the ways consumers manage digital content. The same convergence can be seen in technology as well. First came the iPod, which essentially stored music files in a portable hard drive. Next we saw the iPod with video capability. Now, Apple has announced the development of the iPhone, which incorporates all of the iPod technology, along with desktop applications like a Web browser and e-mail, into a cellular phone. This convergence of technology has raised a number of unanticipated issues for Apple. One such issue relates to the ownership of the Apple trademark. In 1978, Apple Corps, the record label founded by the Beatles, filed suit against Apple for trademark infringement. The suit settled in 1981 for an undisclosed sum with a condition of the settlement that Apple agreed to stay out of the music business. In 1991, another settlement was reached, and Apple agreed that it would not package, sell or distribute physical music materials. Apple was sued again in the U.K. in 2003 by Apple Corps over iTunes and the iPod, which Apple Corps believed was a violation of the previous agreement not to distribute music. After a trial, the presiding judge found no breach of the trademark agreement by Apple. In February, Apple and Apple Corps announced a settlement of their trademark dispute. Under this new agreement, Apple will now own all of the trademarks related to “Apple” and will license certain trademarks back to Apple Corps for their continued use. Although the terms of the settlement are confidential, it is clear that Apple parlayed the success and revenue generated from iTunes and the iPod to take ownership of a well-known trademark in an industry where it was acknowledged to be the junior user. Apple used similar tactics this past February to settle a trademark dispute with Cisco Systems Inc. over its claim to prior rights in the iPhone trademark. Cisco’s claim was based on its iPhone handset for voice over Internet protocol (VoIP), enabling users to make low-cost calls over the Internet. Although the terms of the settlement were confidential, the agreement allowed each of the parties to use their trademark on their own products. As part of the agreement, Cisco and Apple also agreed to investigate opportunities for interoperability in the areas of security, and consumer and enterprise communications. Clearly, by agreeing to the settlement, Cisco saw advantages to tying itself to the Apple marketing machine. In September 2006, Apple also settled patent disputes surrounding the popular navigation interface on the iPod brought by Singapore’s Creative Technology. Apple agreed to pay Creative Technology $100 million to settle the outstanding patent disputes and for a license to use Creative Technology’s patent. In addition, Creative Technology was given the opportunity to join Apple’s “Made for iPod” program. Although Apple was forced to pay a significant sum to settle the matter, it is a relatively small sum for a company that is expected to have revenues in excess of $20 billion in 2007 and that faced costly litigation battles and the prospect of being enjoined from selling its most important product. The intellectual property disputes with Apple Corps, Cisco and Creative Technology illustrate that even a technology-savvy company like Apple cannot predict the future. Apple most likely did not envision that at some point in time, technology revolving around music was going to be the key element of its business model. At the same time, these settlements also point out the effect that a strong brand and being the first to the market can have in resolving intellectual property disputes. Disconnect: Antitrust and IP Apple and iTunes provide a useful illustration on how an attack on IP rights – through arguments related to antitrust law – can threaten innovation. We almost forget that the rise of iTunes only arrived after the rise and fall of entities such as Napster and Grokster – based principally on the concept of piracy. Napster issues of yesterday are not dissimilar to the YouTube problems of today. In a September 2006 speech at the George Mason University School of Law Symposium on Managing Antitrust Issues in a Global Marketplace, Thomas O. Barnett, an assistant attorney general in the Antitrust Divison of the U.S. Department of Justice, addressed the interoperability between antitrust and IP. Barnett discussed the difficulties with applying the concept of “dominance” to the market power that successful companies sometimes gain by creating new technologies and IP rights. “In particular, regulatory second-guessing of private firms’ solutions to technological problems, which I perceive to be on the increase, threatens to harm the very consumers it claims to help,” said Barnett. “Antitrust and intellectual property policy are complements in that both seek to create a set of incentives to encourage an innovative, vigorously competitive marketplace that enhances efficiency and improves consumer welfare.” Barnett goes on to state that seen in this light, strong intellectual property protection is not separate from competition principles, but is an integral part of antitrust policy as a whole. Intellectual property rights should not be viewed as protecting their owners from competition; rather, IP rights should be seen as encouraging firms to engage in competition, particularly competition that involves risk and long-term investment. How ironic that Apple developed a solution to the music industry’s piracy woes, only to now be assailed as being too dominant in failing to “interoperate” with devices other than iPods? In reality, it was the market, not the law, that disciplined Apple. Consumer demand required better accessiblity to PCs and related technologies. He compared this to the videotape struggle, when Sony tried to keep tight control over its proprietary Betamax technology. The marketplace swiftly declared VHS the winner. Jobs Addresses DRM In February, on the company Web site, Apple CEO Steve Jobs posted a response to industry claims relateing to their DRM system. “With the stunning global success of Apple’s iPod music player and iTunes online music store, some have called for Apple to ‘open’ the DRM system that Apple uses to protect its music against theft, so that music purchased from iTunes can be played on digital devices purchased from other companies, and protected music purchased from other online music stores can play on iPods.” Jobs pointed out that iTunes does not own the music its sells, but must license primarily through four music companies that control distribution of over 70 percent of the world’s music. Apple had to convince these companies that its download solution would alleviate fears of illegal copying. Much of the concern over DRM systems had arisen in European countries. “Perhaps those unhappy with the current situation should redirect their energies towards persuading the music companies to sell their music DRM-free. For Europeans, two and a half of the big four music companies are located right in their backyard. The largest, Universal, is 100 percent owned by Vivendi, a French company. EMI is a British company, and Sony BMG is 50 percent owned by Bertelsmann, a German company. Convincing them to license their music to Apple and others, DRM-free, will create a truly interoperable music marketplace. Apple will embrace this wholeheartedly,” Jobs wrote. Two months after this Web posting, we learned that Apple indeed would distribute DRM-free music via its online store, after an agreement was reached with EMI. Once again, the market trumped cries of a competitive disadvantage. What’s next? The next great “i” from Apple is supposed to be the iPhone – a combination of mobile phone, widescreen iPod and a “desktop-class” Internet device with e-mail Web browsing, maps and searching. One pocket-sized device to make calls, watch TV and surf the web. The fast pace of technology provides no real clue to the next great invention or how that technology can be protected and monetized. What Apple does teach us is that the company that can come to the market with a brand and product that consumers want can use that advantage to solidify and expand its place in the market. This can be achieved even against seemingly significant IP issues if the company is realistic in assessing its position and flexible enough to uses its advantages effectively. ANTHONY S. VOLPE , managing shareholder of Volpe & Koenig, has corporate and private practice experience in securing, licensing and enforcing all aspects of intellectual property rights. Volpe has experience in foreign intellectual property matters, including litigations, administrative proceedings, and licensing of territorial and global rights.

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