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With a few notable exceptions, trends in technology tend to languish on the back pages of most newspapers. Every once in a while, though, a few tech-related trends transcend the arcane pages of computer industry magazines and become reflected in changing corporate business practices. Accordingly, these trends, particularly relating to software and software-related technology, should be considered in the due diligence analysis and documentation of corporate acquisitions. These issues go beyond technology companies; they are relevant to any company that uses or commercially exploits customized software as an important element of its business. There is a lot of current discussion about offshore outsourcing, and computer programming services is on the leading edge of this trend. As a result of a growing supply of highly skilled workers in low wage regions, companies are not only moving many vital back office services offshore, in areas such as telemarketing, customer service and payroll services, they are also moving their software development functions, particularly to skilled programmers in Asia and Central and Eastern Europe. In the context of a corporate acquisition, it is critical to investigate whether any important software assets of the target company were developed abroad and in what countries. For any important software assets developed abroad, acquirer’s counsel should work with local counsel to understand the intellectual property regime, particularly the copyright regulations, in the applicable country to help confirm the target company’s rights in such assets. This exercise entails tracing the chain of software rights directly from the natural person creating the computer program through to the target company. It all starts with the computer programmer. Rights in the subject computer programs should vest in the programmer’s employer, either by law or agreement, so it can transfer those rights ultimately to the target company. Otherwise, the target company may not have the required rights in the program. Under U.S. copyright law, the employer owns any work prepared by an employee within the scope of that employee’s duties. This type of work is called a “work made for hire.” However, copyright regulations outside the United States vary. Some countries may not recognize a work made for hire. Some countries provide only a limited work made for hire right for computer programs, which may not apply to ancillary elements like artwork. If a work made for hire right is not recognized in the relevant country, acquirer’s counsel should determine if such ownership was transferred to the employer by means of a contractual assignment from the programmer. It is important to examine the pertinent local law to determine if an employee can contractually forego its rights to its work product under statute. In addition to verifying the target company’s rights in outsourced software, the acquirer must consider piracy risk. Even countries with highly developed copyright regimes may have poor records of enforcing copyright laws. Since outsourcing software development often entails revealing the target company’s previously existing software to the offshore outsourcing company, this activity may expose key computer programs of the target company to unauthorized copying and use. Once acquirer’s counsel, with the help of local counsel, has analyzed the relevant jurisdictions’ copyright laws, counsel must review all the agreements by which rights in outsourced software were transferred to the target company to determine if they present any rights-related problems. Acquirer’s counsel may also consider seeking specific target company representations as to which programs have been developed abroad and in which countries. Finally, if its investigation reveals problems with the chain of rights or any other improprieties, counsel may wish to request specific indemnities, special escrows or carves outs from any indemnity caps relating to possible infringement claims. OPEN SOURCE SOFTWARE A computer virus recently made headlines. The “Mydoom” worm was the most extensive computer virus infection in history. It allowed its perpetrators to gain control of millions of computers, enlisting the machines as soldiers to send a barrage of e-mails, crippling targeted Web sites. The initial target of the attack was The SCO Group, Inc. — hardly a household name. What did SCO do to merit this frontal assault? It challenged one of the central tenets of the “Open Source” software movement: that software wants to be free. Richard Stallman, the father of the Open Source movement, and other Open Source faithful believe that, through the contributions of an amorphous collection of many developers, software can be enhanced and improved much more efficiently than through the programming efforts of a single commercial enterprise that focuses more on controlling access to its products than on improving them. Lamenting the inadequacy of U.S. copyright laws for providing an environment favorable to such collaboration, Open Source advocates have developed radically different license agreements. These licenses are designed to keep access to software open for continual enhancement by the programmer population. Many Open Source computer programs are free, or at lease very inexpensive. As a result, many software developers and corporate IT departments use Open Source software extensively. This use has become so popular that it must be considered in analyzing corporate acquisitions. Open Source software use presents two principal challenges for the commercial enterprise. First, unlike in most traditional commercial licenses, the developers of Open Source software are not accountable to users for infringement or viruses and other types of harmful computer code. Open Source licenses expressly disclaim such accountability, which is where SCO comes in. SCO has commenced a lawsuit against IBM alleging that IBM stole its proprietary computer code and included it in the big daddy of all Open Source programs: the Linux operating system. As an Open Source program, Linux provides no protection to users from infringement claims. Thus, Linux users are exposed to SCO’s claim that, as a result of IBM’s actions, all computers running the current version of Linux are infringing SCO’s intellectual property. If SCO wins, Linux will instantly become much more expensive, with users getting stuck with a big bill. The SCO parable illustrates how an Open Source software user can incur infringement liability: as a user of the software, as a distributor of software that incorporates Open Source software, and as a collaborator that has contributed to Open Source software. In a corporate acquisition, the acquirer’s counsel must investigate the target company for all of these activities. Enterprises that develop their own software for external exploitation should consider certain key provisions in some Open Source license agreements. Most of these license agreements provide for creating derivative works, enabling one developer to modify the existing software in order to improve it. The most prevalent Open Source license agreements, however, impose two key obligations on individuals and companies seeking to modify Open Source software by incorporating it into their own software. First, any further distribution of the modified software must include the source code (the key to understanding the operation of a computer program) for such modifications (hence Open Source). Second, the modified software may only be further distributed on the same terms, including economic terms, as the unmodified software. Thus, if the unmodified software was received without cost, the modified software may only be distributed without cost. Hence, by incorporating Open Source software into products it exploits commercially, a company risks being forced under Open Source licenses to distribute its proprietary software for free, and reveal its source code (thereby possibly helping its competitors to improve their own offerings). It may also be liable to the Open Source licensor for infringement for any copies of the modified software it licensed for a fee or without disclosing its source code. Given the potentially grave consequences of using Open Source software, acquirer’s counsel must thoroughly investigate any such use by the target company. If the target company uses Open Source software, all applicable license agreements must be examined. If the target company has incorporated Open Source software into software it exploits commercially, acquirer’s counsel must determine if the target company has distributed such software in compliance with such licenses. If the target company has collaborated to modify Open Source software, counsel should investigate the environment in which modifications were made: What records are available concerning the creation of the modifications? Who created them? Have the creators signed adequate employment or independent contractor agreements? Were the modifications made in collaboration with any outside consultants or employees of another company? Did any agreement cover such collaboration? All these questions must be answered in order to understand the risks involved. The target company should be required to provide specific representations concerning its Open Source activities, including whether and what Open Source software has been used, what derivative works have been created and the nature of the distribution of those works. If acquirer’s counsel in investigating such activities unearths any of the types of problems discussed here, counsel may recommend requiring special indemnities, special escrows or carve-outs to indemnity caps from the target company to address the risks presented. CONTROLLING EXPORTS AT HOME With the country’s heightened sensitivity to the proliferation of weapons of mass destruction, the mission of the Bureau of Industry and Security of the U.S. Department of Commerce has been expanded. Accordingly, acquirer’s counsel should investigate any target company producing technology with possible military applications to determine its compliance with U.S. export control laws. Companies may be unaware that they can export technology without ever shipping any portion of it beyond the U.S. border. These “deemed exports” can occur when controlled technology is disseminated to a foreign national in the United States. This is considered an export to that foreigner’s home country. The regulations exempt dissemination to aliens that have permanent residence status in the United States, aliens who are granted U.S. citizenship and aliens of certain “protected classes,” mostly refugees. Technology dissemination in the United States that may require an export license includes disclosure in meetings with foreign nationals, site visits and visual inspections by foreign nationals, releasing source code to employees working under temporary work visas, and posting data on U.S. Web sites without screening end-users. To investigate the target company’s export compliance, acquirer’s counsel should determine the Export Control Classification Numbers for any software (although beyond the scope of this article, this applies to other technology as well) that the target company produces. The target company should also furnish copies of all export licenses obtained and applications made. In addition, counsel may request a representation as to whether any foreign employees have had access to controlled technology. Marc S. Reisler is a partner in the corporate department of Katten Muchin Zavis Rosenman (www.kmzr.com/)and a co-head of the department’s media, technology and Internet practice group. Moran Eizenberger-Brown, an associate at the firm, assisted in the preparation of this article. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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