In this week’s IP Matters, Dolby has sued Adobe for infringing copyrights in its Dolby technology. (Dolby is also unhappy about Adobe’s alleged breach of contract.) After unsuccessfully trying to get Adobe to cooperate, Dolby has gone to court for redress. From Dolby’s 40-page complaint against Adobe which was filed 12 days ago, Dolby is obviously not entertained by Adobe’s seeming hide-and-seek games. Will Dolby win?

Dolby (Dolby Laboratories Licensing Corporation and Dolby International AB) has sued Adobe (Adobe Systems Incorporated) for allegedly infringing Dolby’s copyrights and breaching its licensing agreement.

While Dolby makes the technology and licenses it to Adobe, Adobe sells the technology with its innovative products and services.

Dolby is a big brand name in the entertainment technologies space globally. From cinemas to digital cable; digital broadcast to mobile media; DVD players to digital-broadcast TV; and internet video services to personal computer softwares, Dolby uses technology to make audio and audio-visual entertainment a great experience for users. But Dolby doesn’t sell its technologies to users directly. It creates and licenses its technologies to other big companies–such as Adobe.

Adobe is also a big brand name, especially to creative professionals and enterprises around the world. Described as one of the largest software companies in the world, Adobe sells products and provides services to app developers, creative professionals, enterprises, and individual consumers. To keep its products and services competitive and innovative, Adobe needs cutting-edge technology from makers such as Dolby.

Dolby and Adobe have been in business together since 2002 after both parties entered into a licensing agreement. Between 2002 and 2017, Dolby licensed Adobe to use Dolby’s technologies in Adobe’s products and services. Dolby was Adobe’s technology enabler. In turn, Adobe pays royalty to Dolby.

When Adobe entered licensing agreements with Dolby, Adobe knew what it was getting into.

In 2003, 2012, and 2013, Adobe entered into Licensing Agreements with Dolby. Adobe got licence for use of Dolby technologies subject to terms and conditions in the Licensing Agreements. One of the terms include royalty payments by Adobe to Dolby for each Dolby-technology-enabled product or device Adobe licenses to its own customers. Though the Licensing Agreements allowed Adobe to prepare its own periodical reports to Dolby, Dolby was entitled to inspect and audit Adobe’s books and records through third-party audit.

The 2003 Licensing Agreement was clear about Adobe’s obligations to provide Dolby with quarterly reports. Adobe was also obliged to “keep complete books and records of all sales, leases, uses, returns, or other disposals by [Adobe] of Licensed Products for a period of three (3) years from such sales, leases, uses or other disposals.” Under the Agreement, Adobe permitted Dolby to inspect, examine, and make abstracts of Adobe’s books and records “insofar as may be necessary to verify the accuracy” of the books and statements provided.

Dolby ensured that the Licensing Agreements gave it the right to audit Adobe’s books and records, if Dolby smelled a rat or just wanted to make sure both parties were still on the same page regarding terms of the licensing agreements.

Under the 2012 Licensing Agreement, Dolby further protected its business interest by detailing requirements for reporting—reports became quarterly, within 30 days after the end of each calendar quarter. In the report, Adobe would identify any sales of a Licensed Product that occurred during the previous calendar quarter.
The Agreement further required Adobe to “cooperate with this examination and provide reasonable access to…all information (including information not related to Sales of Licensed Products necessary to verify the integrity of Adobe’s records and the accuracy of Adobe’s Quarterly Reports, and…relevant personnel requested by Dolby…as necessary to allow the examination to be completed in a timely manner.”

When Adobe looked like it was hiding skeletons in its cupboard in the cloud, Dolby became suspicious and insisted on audit.

But according to Dolby, when Dolby wanted to inspect Adobe’s books and records on 5 January 2015 for inspection period 2012–2014, and also audit Adobe’s books through a third party, Adobe only permitted an audit. Yet the permitted audit only involved reviewing Adobe’s previous reports to Dolby, which Dolby considered inadequate. Dolby also alleges that for the inspection period 2015–2017, Adobe has failed to comply with the contractual obligation regarding reports and audits.

Forced to grope in the dark after Adobe allegedly provided “limited, incomplete information”, Dolby is unable to determine the full extent of Adobe’s copyright infringement and contractual breaches.

But as far as Dolby is concerned, Adobe has infringed on Dolby’s copyrights and breached the contract between the parties. 

Dolby alleges that Adobe has sold Adobe products—Audition, After Effects, Encore, Lightroom, and Premiere Pro—outside the scope of its licenses with Dolby.

Dolby alleges as follows:

1. Adobe improperly consolidates multiple software products in an attempt to avoid paying royalties properly due to Dolby;
2. Adobe fails to report and pay for site licenses;
3. Adobe improperly reports and pays for multiple sales to a single customer;
4. Adobe misreports Professional Products, one of its alleged tactics to avoid the proper payment of royalties to Dolby;
5. Adobe fails to properly report and pay for upgrades;
6. Adobe misreports Dolby Technology contained in Adobe products;
7. Adobe misapplied licence issued to it for Adobe’s Creative Cloud Professional Software services and the Professional Software Licensed Products to Adobe’s Creative Cloud subscription service between the second calendar quarter of 2012 and the first calendar quarter of 2017; and
8. Adobe’s licenses in each and all of the License Agreements with Dolby expired on or about 30 September 2017.

On the grounds above, Dolby has submitted a 5-count charge against Dolby at the United States District Court, California. The 5-count charges are copyright infringements, breach of contract, breach of representation and warranty, breach of implied covenants, and specific performance of audit rights.

We are yet to know what Adobe’s response is to these charges. Will Adobe argue that it didn’t use Dolby technology in the products and services in question as alleged? Or will Adobe settle this quickly outside the courtroom? Similar suits have ended this way.

Dolby is unhappy and wants the court to call Adobe to order and get Adobe to pay for allegedly infringing Dolby’s copyrights and breaching the contract.

For reliefs, Dolby has asked the Court to hold Adobe liable for infringement of Dolby’s copyrights. Dolby also wants the Court to grant an injunction stopping Adobe, all its people, and persons in active concert or participation with it, from continuing to infringe Dolby’s copyrights. Amongst other reliefs bordering on damages and costs, Dolby wants the Court to impound and destroy all copies of any Adobe products made or used in violation of Dolby’s copyrights.

These are 3 major things you should know about software licensing: 

1. Software in most countries is generally categorized as a literary work protectable under copyright law. It is ‘literary’ because it is written (in computer language). The implication of this is that when you copyright your software, only the original expression in a fixed medium is protected, not the new or inventive functions of the software. To protect new and inventive functionalities, you have to get a patent;
2. Licences are licences—they expire after the specified date. It’s the same with software licensing. This is why the term or duration of a licence should always be stated otherwise it is effectively a sale; (Notice Dolby has argued above that the licences to Abobe expired in September 2017.)
3. Software-licencing agreements are delicate. A clause or the absence of it can either make or mar the whole license. Never “copy and paste” a software-licence agreement that wasn’t prepared for you. Never. When you ‘google’ software licence, there are two common and likely facts: If it’s too general, it’s most likely inadequate. And if it’s too particular, it’s most likely not for you. Consult professional help.
4. A software licence is not only licensing your software or technology, but your IP. Here, IP may include your copyrights, know-how, patents, and trademarks, or even trade secrets. So don’t mess with it—especially if your licensing strategy is part of your IP business, as it is for Dolby Licensing. Get pricing right!

For software owners or licensors, what can you take away from Dolby’s experience? 

1. Never license your software without having a comprehensive licensing agreement. Ensure that under the licence, you have effective control over what, when, where, who, and how in relation to the licence.When Dolby realized that Adobe’s new subscription model and SaaS model were starting to make computation of royalties difficult, Dolby had subsequent agreements signed with Adobe to take care of this aspect and also tightened up requirements for reporting and auditing;
2. Consider including a clause on reporting and auditing. This is particularly essential when licensing to a reseller or technology company that sells the software or technology directly to consumers or end users;
3. Ensure you protect your intellectual property adequately. Adequate protection requires that you have a comprehensive clause on your exclusive copyright ownership of the software, including patents, trademark, or industrial designs, if any; and
4. As a software or technology owner or licensor, endeavour to keep innovating so your licensed software or technology does not become difficult to monitor or manage. In Dolby’s case, after Adobe introduced software-as-a-service (SaaS) in the cloud, Dolby was bound to have problems determining the royalties due to it since various licenses may be bundled into one as a creative suite.

In IP matters, it’s never too early because IP matters to business and development, any day.