Monthly Archives: November 2017

The Why of Privacy: 4 Reasons Privacy Matters to People, and Why Companies Need to Know Them

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While almost all companies collect and use their customers, visitors and users’ personal information, primarily online and through in-person customer interactions such as point-of-sale transactions, the privacy landscape is in a near-constant state of turbulence and flux. There is the steady flow of data breach reports affecting companies of almost every size and market segment. New data privacy laws, rules and regulations continue to be introduced and enacted around the world, such as the US-EU Privacy Shield program, the EU General Data Protection Regulation (GDPR), and Argentina’s draft Data Protection Bill, placing new legal obligations and restrictions on the collection and use of personal information. Challenges continue to be raised against laws which are perceived to overreach or conflict with privacy rights, such as the continued challenges to the Privacy Shield program and EU’s Model Contract Clauses.

The one constant in this turbulent landscape is that consumers’ awareness of data privacy and security continues to grow. Given this, it is important to step back from the day-to-day privacy developments and look at a more fundamental question. It is axiomatic in the world of privacy that privacy matters to people, but why it matters is more complicated. People often argue about why privacy is important to individuals, but there is no “one-size-fits-all” answer. Privacy matters to different people in different ways, so there are many equally valid reasons why privacy is important to individuals.

Understanding the “why of privacy” is also critically important to businesses and other organizations. By now, most companies understand the importance of providing notice of their privacy collection practices and choice with respect to the use of collected information. A company collecting, processing and/or controlling personal information that understands the reasons privacy matters to the data subjects whose data they collect and use can design more effective privacy practices and policies attuned to the needs of their data subjects, such as by creating customer privacy profiles for use in product design and testing.  This follows the “privacy by design” framework advocated by the Federal Trade Commission and helps increase trust in the company’s commitment to data privacy and security, which is critical to the success of every company in today’s world and can provide a competitive advantage.

The reason why privacy matters differs from person to person. However, I believe these reasons can be grouped into four core categories: (1) privacy is a right, (2) privacy is an entitlement, (3) privacy is an expectation, and (4) privacy is a commodity. I’ll explore each of them in turn.

Privacy is a Right

Persons falling into this first category value privacy as an irrevocable right guaranteed to all. People living in countries with constitutional data privacy protections often fall into this category. For example, the European Union Charter of Fundamental Rights recognizes the right to data protection and the right to privacy as fundamental human rights. In some countries, it has been implied through interpretation of constitutional and legal rights, such as the right to privacy found by the U.S. Supreme Court and the right to privacy recognized under the Canadian Charter of Rights and Freedoms even though it does not specifically mention privacy. In August 2017, a unanimous Supreme Court of India held that privacy is a fundamental right as an integral part of the Right to Life and Personal Liberty guaranteed under Article 21 of the Constitution of India.  The 1948 United Nations’ Universal Declaration of Human Rights states that people have a fundamental human right not to “be subjected to arbitrary interference with their privacy, family, home or correspondence.”

  • People in this category are more likely to take a very rigid view of privacy trumping all other interests, including business interests, and may be less willing to “trade” any of their privacy for other benefits such as increased security.
  • People in this category tend to expect that any consent given to use personal information must be clear, unambiguous, express, and fully revocable and that use of the information must be specifically limited to the grant of rights or as otherwise expressly permitted by law, which creates a significant burden for businesses and other organizations collecting and using personal information.
  • Privacy as a right is an individual view– the rights of the individuals to protect their personal information are paramount to almost all other rights by others to use or access that personal information.

Privacy is an Entitlement

Persons falling into this second category value privacy as something to which they are entitled under laws, rules and regulations applicable to them. There are many laws, either comprehensive data privacy laws such as Canada’s PIPEDA or sectoral laws such as the privacy laws enacted in the United States, whose prohibitions or restrictions on privacy practices may be viewed by individuals as creating privacy obligations to which they are entitled. An example is the U.S. Children’s Online Privacy Protection Act, which among other things prohibits the collection of personal information from children under 13 without verifiable parental consent. Some parents view COPPA as creating an entitlement for their children to be left alone unless the parent consents to the collection of personal information from their children.

  • Similar to privacy as a right, people in this category are likely to view privacy as trumping other interests, including business interests, and may be less willing to give up privacy for other benefits.
  • They tend to expect that any consent given to use personal information must be fully compliant with legal requirements, and that use of the information must be specifically limited to those use rights expressly permitted by law, which creates a burden for businesses and other organizations collecting and using personal information.
  • As with privacy as a right, privacy as an entitlement is an individual view, where a individual’s entitlement to privacy outweighs other interests in a person’s personal information.
  • A key differentiator between privacy as a right and privacy as an entitlement is that an entitlement can be revoked, e.g., through changes to the law, whereas a right is irrevocable. While some might argue that a judicially-recognized right to privacy should be an expectation, I believe that the recognition by a country’s supreme court that privacy is a right, which is unlikely to be overturned or legislatively reversed, should be considered a right.

Privacy is an Expectation

Persons falling into this third category value privacy as something they expect to receive, whether or not they have a right or entitlement to it. New technologies (such as drones and biometric identifiers) and practices (such as marketing strategies) tend to be ahead of laws specifically governing them, and people in this category expect to receive privacy protections regardless of whether existing laws or other rights cover the technology or practice. They may also expect societal norms with respect to privacy to be followed by businesses and other organizations, whether or not stricter than applicable legal requirements. There are also certain expectations of privacy that are generally recognized within a given society. For example, in the United States, many people have an expectation of privacy in their own home and other private areas such as a public bathroom stall. If a person or organization interferes with this expectation of privacy, there may be legal liability for invasion of privacy under state laws. There are other expectations of privacy on a per-situation basis, such as a private conversation between two individuals.

  • People in this category believe that third parties, such as companies and government entities, should recognize that their expectation of privacy trumps those third parties’ desire (or rights) to access and use their personal information, but also understand that the expectation of privacy has limits. For example, a person should not have an expectation of privacy in a public place (e.g., a public sidewalk), and there is no right of privacy that extends to a person’s garbage placed on the street for collection.  In the United States, there is also no expectation of privacy in the workplace.
  • An expectation of privacy can be breached by a superior interest by a third party. For example, if a court approved surveillance of someone suspected of engaging in illegal activity, any expectation of privacy that person may have that his conversations are private is superseded by the government’s interest in preventing and prosecuting crime.
  • People in this category also generally do not question or challenge the terms of a privacy policy or other agreement granting rights to use or collect their personal information. People in this category also tend to expect businesses and other organizations collecting and/or using their personal information will not unreasonably collect or use their personal information, and will respect usage opt-out requests.
  • Privacy as an expectation is a middle-of-the-road view, in which the individual view of privacy as paramount is tempered with the understanding that in some cases the general or specific value of allowing a third party to receive and use their personal information outweighs the personal interest.

Privacy is a Commodity

Persons falling into this fourth category value privacy as a commodity that they are willing to exchange for other benefits, goods or services. We live in an information economy, where data has been commoditized. To many companies a core or important part of their product or service offering (i.e., part of the general value of the product or service) or business strategy is the ability to monetize personal, aggregate, and/or anonymous data collected through its use. Companies argue that the value derived from data monetization is factored into the value and cost of the product or service. Other companies offer something of specific value, such as registering for an extended product warranty, for sharing personal information such as an email address or demographic information. Many people give businesses some rights to use their personal information simply by visiting a webpage, requesting information from them, or purchasing goods or services from them in which they agree to be bound by the company’s privacy policy or terms of use/terms of sale. We also live in a world where many people are willing to sacrifice some privacy in exchange for increased security against terrorism and other potential physical and cyber threats. People falling into this category have a strong understanding of the trade-off between privacy and other benefits.

  • People in this category are more willing to give third parties the right to use their information as long as the thing they receive in return is valuable enough to them – they view their personal information as currency. If a company or organization offers something of value, they are very likely to agree to share personal information with that company or organization. These are the kind of people who don’t really care that they’re receiving targeted ads while surfing online.
  • Conversely, if they do not believe they are receiving value in return for their personal information, people in this category are more likely not to share their information.
  • Privacy as a commodity is a transactional view, meaning that the an individual is willing to allow a third party to receive and use their personal information if the general or specific value of allowing that third party to receive and use the information outweighs their personal interest in keeping their information.
  • It may require a greater transfer of value to convince someone viewing privacy as a right, entitlement or expectation to treat it as a commodity.

 

As a closing thought, these four reasons why privacy matters to people are not mutually exclusive, meaning that there are additional sub-categories of people for whom two or more of these reasons are important. For example, it is possible for someone to view privacy as both an entitlement and a commodity. Such a person would expect that while they have the ability to exchange their personal information for something of value, it must always be a voluntary exchange – they would reject any need to trade away their personal information. Businesses who take the time to understand the “why of privacy” will find themselves better positioned to create sample customer profiles based on their customers’ privacy values, leading to more robust privacy practices, processes and policies and a potential competitive advantage on privacy in the marketplace.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric enjoys reading and implementing and integrating connected home technologies and dabbles in voice-over work.

Use the Right Intellectual Property Contract Terms To Protect Against IP Risk

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In most technology and service agreements, one or both parties use or license the other party’s intellectual property (IP), or one party uses or licenses its own intellectual property for the other party’s benefit. However, using or benefiting from another party’s IP carries certain risks, including the risk of an infringement claim, ownership or licensing disputes, open source software, and risks arising from a bankruptcy of the IP owner/licensor.  Where managing the risks from that IP usage is important, having the right contract clauses in place to shift and mitigate this risk can be critical.

There are a number of contract clauses that can be employed to manage and shift IP risk. Two contract clauses in particular – the IP representation/warranty and the IP indemnity – may seem complimentary but can expose a party to unintended liability if used together.

IP Representation/Warranty and IP Indemnity

There are two clauses which can shift the risk of intellectual property infringement – an express representation/warranty of non-infringement and an indemnity against non-infringement. (I will not cover implied warranties of non-infringement under the Uniform Commercial Code, which are very frequently disclaimed in technology and service agreements.)

A representation/warranty of non-infringement is a statement of fact (rep) or statement or promise of condition (warranty) that intellectual property licensed and/or used does not infringe the intellectual property or other proprietary rights of third parties. An IP rep/warranty may be knowledge-qualified, i.e., “to the best of [owner/licensor’s] knowledge.” An IP rep/warranty allows the IP owner/licensor to stand behind its intellectual property, and allows the IP user/licensee to assert an “innocent infringer” defense to certain IP claims. However, like other reps and warranties, there are potentially meaningful consequences if they are breached. Like other breaches of representations, a breach could give rise to a right to void the contract and rescission damages.  Like other warranties, a breach can give rise to contract remedies, a right to withhold or cease performance under the agreement, and/or a right to terminate the agreement for cause.  The user/licensee is required to prove damages resulting from a breach of an IP representation or warranty.

An intellectual property indemnification is an obligation to defend, indemnify, and hold harmless the other party from and against losses, damages, and expenses arising or resulting from a third-party IP infringement claim. (Most service providers avoid first-party IP indemnity clauses, as they are effectively an insurance clause.)  This can be a standalone IP indemnity clause, or an indemnification obligation for breaches of reps/warranties where the agreement contains an IP rep/warranty. As it’s very difficult for an IP user/licensee to determine or mitigate the risk of infringement itself, the IP indemnity allocates this risk to the owner/licensor (subject to the limitation of liability) without the need for the user/licensee to prove damages or other losses. Watch the geographic scope of the indemnity to ensure it matches where the IP will be used – if it’s limited to US patents/trademarks, for example, a user/licensee would not be protected from a claim that their use violates an EU patent. IP indemnification clauses usually include procedures for tendering a claim for defense and language governing who controls the defense, assistance provided by the indemnified party, and settlement of an indemnified claim. A major benefit of an IP indemnity is that the indemnified party does not have to incur or prove damages resulting from an IP infringement claim first; as long as an indemnified claim is brought against the indemnified party, the indemnification obligations apply. As long as the indemnifying party complies with its defense and indemnification obligations, the indemnified party does not have a right to terminate the agreement.

Service providers will often put contours around the scope of the intellectual property indemnity by including limitations to the obligation to indemnify based on certain acts or omissions of the indemnified party. These include where the user/licensee uses IP outside the scope of the license or terms; where the user/licensee modifies the IP other than as authorized by the IP owner/licensor; where the infringement claim results from the combination of the IP with other products or technology not provided by the IP owner/licensor; and where the user/licensee fails to accept or use an updated version of a product or service provided by the IP owner/licensor which has been modified to be non-infringing. Some parties also exclude IP protection where the claim results from open-source software used in their products or systems. One thing to watch for is whether the exclusions are comparative (claims are excluded “to the extent” that an exception applies) or absolute (if any of the exceptions applies, indemnification is not provided).

Savvy service providers and IP licensors understand that including both of these clauses into an agreement can have unintended consequences, such as the potential for remedy “double-dipping.” If a contract contains both an IP indemnity and IP warranty protecting Party B, and a third-party IP claim is asserted against Party B, Party B may be able to both assert a breach of rep/warranty claim and seek damages for breach of the warranty or seek to terminate the agreement for cause, while also tendering the third party claim to Party A for defense and indemnification. Because of this, many licensors and vendors will offer an IP indemnity, but not an IP warranty. However, this eliminates the ability for the user/licensee to rely on the rep/warranty as an innocent infringer. If both the rep/warranty and indemnity are used, one approach to harmonizing them is to add language to the IP warranty stating that the sole and exclusive remedy for breach of the IP warranty is indemnification pursuant to the IP indemnity. This gives the user/licensee the “innocent infringer” benefits of the IP warranty protection as well as the IP indemnity protection, while ensuring that a breach of the IP warranty does not result in a claim outside of indemnification obligations.

Other Intellectual Property Risk Protections

In addition to IP reps/warranties and IP indemnities, there are other contractual protections which can be used to protect against IP risk.

Indemnification Remedy Clause

Where infringement occurs, the IP user/licensee often wants more than just to be protected — they want the right to keep using the IP for the duration of the agreement. In the event of actual infringement, neither an IP rep/warranty nor IP indemnity forces the IP owner/licensor to remedy the infringement. This is why many agreements include an additional IP infringement remedy clause which generally commits an IP owner/licensor facing a claim or judgment of IP infringement to obtain the right to continue to use the impacted IP, to modify the IP so that it is non-infringing, or to replace the impacted IP with a non-infringing alternative. In some cases, if none of the remedies are feasible, one or both parties may be given the right to terminate the agreement; where a termination right exists, users/licensees should consider whether to ask for a prorated refund of license/usage fees for the remaining terminated period of the agreement. Watch for language on the timing of the remedy – in most cases, it’s when the indemnifying party is found to be infringing by a court of competent jurisdiction (and not when the claim is first asserted), which generally does not impact the user/licensee as the defense and indemnification obligations should apply prior to that point.

Allocation of risk (limitation of liability) Cause

While an IP indemnity and rep/warranty shifts risk to the IP owner/licensor, the amount of risk shifted is allocated between the parties through the limitation of liability clause. Is the indemnifying party willing to provide uncapped liability for its IP indemnification obligations? Some service providers have not priced unlimited liability into its fees, or is unwilling to provide uncapped liability as a policy or due to insurance limitations. The user/licensee usually wants to negotiate the broadest liability cap possible; one common compromise is to negotiate a “super-cap” for IP indemnification obligations above the base limitation on direct damages but short of uncapped.

It’s important to also look at the disclaimer of consequential damages. An indemnified claim can include consequential damages as part of the third-party claim (e.g., lost profits).  If the disclaimer of consequential damages does not specifically exclude indemnification obligations, any such damages claimed by a third party may not be indemnifiable which may not be what one or both parties want.  It’s important to note that there is a significant difference between third-party consequential damages awarded in connection with an indemnified claim, and first-party consequential damages related to an indemnified claim (e.g., the indemnifying party should not have to pay for a company’s lost profits due to an executive having to travel and participate in a deposition in connection with an indemnified claim). An exclusion to the disclaimer of consequential damages for third party damages awarded in connection with, or included in the settlement of, an indemnified claim may provide a finer point on the exclusion.

IP Ownership Clause

Another contract provision which can be leveraged to mitigate IP risk is the IP ownership clause, which addresses ownership of each party’s pre-existing IP as well as any new IP created in connection with the agreement. This clause is ideally located up front in a base agreement between the parties, but sometimes will be placed in a Statement of Work (“SOW”) or other ancillary document instead (order of precedence language in the base agreement can be critically important in that case). Ensure that each party retains ownership of its own IP (except to the extent ownership is transferred to the other party), and that each party is prohibited (to the extent permitted by law) from reverse engineering, disassembling, de-compiling, creating derivative works from, renting, selling, leasing, acting as a service bureau regarding, or otherwise attempting to learn the source code of the other party’s IP. If neither company will acquire ownership rights to the other’s IP (even IP created in connection with the agreement), make sure the ownership clause clearly covers this.  If one company will transfer ownership of developed IP (a “deliverable”) to the other, ensure the agreement clearly defines the deliverable and states that the deliverable is considered “works made for hire” as defined in the US Copyright Act, and consider adding language regarding transfer and assignment of the IP rights in and to the deliverables (which may be tied to payment for the deliverable). If a deliverable contains the developer’s pre-existing IP, consider asking for a perpetual, irrevocable, worldwide right and license to sue the pre-existing IP as part of the deliverable (this may cause the IP indemnity to survive in perpetuity).

IP Insurance Clause

Another way to mitigate and shift the risk arising from IP is through intellectual property insurance. IP insurance can be obtained through specialized policies such as a cyber liability policy and media liability policy. Coverage for IP infringement claims may not be available under comprehensive general liability (CGL) coverage – check your policy or walk through coverage with your insurance broker to ensure you understand what your IP insurance policies (or typical policies) cover and don’t cover. Users/licensees may want to ask the IP owner/licensor about IP insurance they carry, and request that the owner/licensor be obligated to maintain their insurance and protect the user/licensee under the policy, e.g., by tying the contractual limitation of liability to the policy coverage.

Open source software Clause

In many cases, companies use open source software (“OSS”) in their IP. There are a number of good reasons companies do this, including lower costs, better quality, and a large support community. As IP owners/licensors did not create the OSS they use, many will disclaim OSS from IP representations, warranties, and indemnities. However, there are risks to OSS usage. For example, under some OSS license types, software which uses OSS governed by one of those licenses becomes governed by that same license, which can include requirements to disclose the source code upon request or other limitations. Users/licensees may want to consider including an OSS representation/warranty that any IP or other deliverables provided to it will not contain open source software which has not been disclosed in the agreement or a SOW.

Rights in Bankruptcy(§ 365(n))Clause

Licensees under software license agreements have a special tool for mitigating risk arising from a bankruptcy of the software licensor. When a company enters bankruptcy, the licensee (or debtor-in-possession) has certain rights to “affirm” or “reject” the debtor’s executory contracts, including some license agreements. 11 U.S.C § 365(n) gives licensees certain rights to continue to use licensed software in the event of the bankruptcy of the software licensor. To ensure these protections are available, consider including a clause in the agreement protecting the licensee’s rights under this section.

Software Escrow Clause

Finally, consider whether to include a contractual requirement for the owner/licensor to escrow licensed software.  For more on software escrow, please see my earlier post on software escrow.

An earlier version of this post first appeared as an article on my blog,Notes from the Trenches.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing, compliance and practical risk management, and is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles invoice-over work and implementing and integrating connected home technologies. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice.