Monday, December 1, 2014
As published in the Irish Times on Monday 1st December 2014
Crowdfunding must ensure IP rights are not infringed
Crowdfunding, as an alternative way of financing a business or project, is experiencing rapid growth internationally and in Ireland. Globally the market is estimated to be worth $15 billion, representing a huge opportunity for up and coming businesses and platforms.
Crowdfunding allows a business to seek financial backing from the “crowd”, be it existing customers, investors, or just random members of the public who like the idea or investment proposal on a website (known as crowdfunding platforms or portals).
An important issue for many crowdfunding campaigns is intellectual property (IP), that is, the bundle of rights enjoyed by a business for things such as brand names, inventions, and software.
For many businesses in today’s digital age, intellectual property is what sets its offering apart from its competitors. Corporations go to huge expense in researching and developing their products and services and they seek to protect the output of that work by claiming certain rights, for example, by filing for a patent or registering a trade mark.
For companies posting their idea online, they need to be careful that they are not infringing third party IP rights; and that they assess the IP that they may have created and make sure to protect that IP in advance of disclosing their product to the world. Disclosing an invention to the world can prevent an inventor from ever getting a patent on that invention and the company itself would need to have done the necessary background checks to ensure the product is not already patented by a third party.
Crowdfunding platforms also need to be conscious of the role they play in helping a business promote their products and services, including the related IP rights.
Earlier this year, news emerged about the settlement of a case between LVMH Moet Hennessey Louis Vuitton and eBay Inc. A number of brands under the LVMH umbrella had sued eBay for allowing counterfeit goods to be sold on its website. The initial ruling against eBay was for nearly €40 million in damages, which was reduced to nearly €6 million on appeal. The parties later settled their dispute.
EBay had been found to be in breach of its duty of care in not providing adequate screening systems or general warnings – thereby not doing enough to prevent counterfeit goods to be marketed via the eBay website.
EBay had been acting as an internet service provider (ISP). Under the E-Commerce Directive there are certain exemptions for passive service providers that are merely conduits for content that appears on their site.
The French court of appeal in the eBay case referred to a 2010 judgement in the “Google AdWords” case where the judge, referring to the E-Commerce Directive, stated that the exemptions from liability for ISPs established in that directive cover only cases in which the activity of the ISP is “of a mere technical, automatic and passive nature” which implies that the service provider “has neither knowledge of nor control over information which is transmitted or stored”. In applying this decision, the French court determined that due to the services provided by eBay, it did not play a passive role but that it was acting as a broker.
This case highlights important issues for crowdfunding platforms in the context of IP rights, for example what kind of checks should a crowdfunding platform have in place to make sure a business seeking funding on its site is not infringing third party IP rights.
The eBay case suggests that where an ISP or crowdfunding platform goes beyond the mere passive role and is not merely a conduit for placing a funding request, it is open to challenges from third party IP right holders who claim their IP rights are being infringed (as did the brands under the LVMH umbrella in suing eBay). It could be difficult for platforms to argue that they are mere conduits, particularly where they take on an active role in placing a business on their site to look for finance. Platforms will often undertake background checks, verify information supplied by a business and generally screen the companies that wish to use their particular platform. Before launching a crowdfunding campaign, businesses need to undertake thorough research to make sure their offering is not infringing the IP rights of a third party; and pause to think whether they should register or file for IP protection in advance of a public disclosure.
Platforms also need to cover off IP as a potential risk. The eBay case reminds us of the potential exposure an ISP can face if it moves beyond the passive ISP role to a more involved broker relationship.
In my view, for a crowdfunding platform to thrive it cannot afford to take a passive role as the market will demand genuine quality projects, which will require some form of vetting on behalf of the platform.
Therefore in order to protect itself, the platform must adhere to its local laws on due diligence or verification of project owners and their projects; and ensure their terms and conditions provide robust protection to guard against infringement of third party intellectual property rights.