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Bread & Kaya: Start-ups, get your house in order

My 4th Bread & Kaya’s column was published on Digital News Asia on 3 April 2013.

Bread & Kaya: Start-ups, get your house in order

– There are a number of things you need to get done before potential investors do due diligence on your start-up
– Seek advice from others, ensure any legal advice is professional, and do due diligence on your investor as well

Bread & Kaya by Foong Cheng Leong
3 April 2013

WHEN I was in high school, I invested a few thousand ringgit on a web-hosting company operated by a ‘friend.’ Unfortunately, the web-hosting company didn’t materialize and I never saw my money again, nor the ‘friend.’ In fact, there was no such web-hosting company!

That was my first failed investment. Looking back, I realized that the investment was purely done by trust. I did not do any background check on the company or even the ‘friend.’

But years later, I was approached by a stranger (at that time) to help his start-up by providing my services to him, in return for shares in his company. I did not invest a single ringgit. I am glad to report that the start-up is doing well, with offices around South-East Asia and other parts of the world.

Today’s column sets out some tips before opening your start-up for funding.

Before you think about attracting investors, you need to get your house in order. Prudent investors would usually do an in-depth due diligence of your company to see, among others, what assets and liabilities you have.

They will check your background, hence you need to make sure it’s squeaky clean. They will obtain a company search report from the Companies Commission of Malaysia to verify the details of your directors and shareholders, shareholding structure and financial reports – so make sure you file your reports on time.

They will also go through your memorandum of association and articles of association (documents that are required before incorporating a ‘Sdn Bhd’). Take some time to read them and amend if necessary. Board and shareholders minutes will also be part of due diligence exercise.

Investors usually come with high expectations. Thus, educate your investors of the nature of your business and industry, business plans, goal, competitors and obviously, monetizing strategy. Over-promising will create legal trouble for you.

When meeting your investors, appoint someone presentable who speaks well to deal with them. This raises investor confidence.

Other than your financial records and information, here are some common matters that should be addressed before the due diligence stage.

1) Intellectual property rights

Intellectual property rights generally refer to your trademarks, copyright, industrial designs, confidential information and patents.

Start-ups generally file their trademarks first as it is affordable. If you have a physical product and the design is new, do consider filing an industrial design to protect the design.

Patents are usually not filed due to budget constraints. A patent application (with the assistance of a patent attorney) costs at least RM5,000 and above. However, if the invention is novel and you think it’s worth protecting, do file it within one year otherwise it will not be afforded protection.

You can file for protection with the Intellectual Property Corporation of Malaysia (MyIPO), or if your business or operation extends to other countries (e.g. Singapore), you should register your rights there too.

A registered intellectual property right gives you the exclusivity over your product, thus you may stop others from using them. Also, the Income Tax (Deduction for Expenditure on Registration of Patent and Trade Mark) Rules 2009 provides tax deduction for the registration of trademarks and patents in Malaysia for certain start-ups.

2) Proper contracts

All terms and conditions between the founders, with merchants, customers, vendors and employers must be properly spelled out. For existing contracts, review them to see whether they are still applicable or have to be changed or terminated.

Here are a few tips:
– In your agreements with customers, investors will look on how revenue is generated and to find any unfavorable terms, etc. Do make sure your contracts (or invoice or receipt) with service providers (e.g. graphic designer, website, software) do not state that intellectual property rights (in particular, copyright) belong to them (by default, intellectual property rights belong to the person who commissioned the work, unless stated otherwise). Such contracts should describe the subject matter in detail and that the rights to the intellectual property are properly assigned to your company.
– If you are using a website or a software application to deal with your customers, put terms of use or services and a privacy policy in place as required by the Consumer Protection (Electronic Trade Transactions) Regulations 2012. Do not rip off terms of use or services and a privacy policy of others as those agreements are drafted specifically for their businesses.

3) Non-disclosure agreement

Before opening your door to investors, do get them to sign a non-disclosure agreement (commonly known as an NDA). This agreement is crucial in making sure that they do not misuse the information they gathered from the due diligence. Such information may include your finance information, source codes and customer data.

Your investors may also want to look into the source codes of your proprietary software. Although an NDA may be signed to protect it, you may want to take an extra step to request that the software due diligence is done by an independent third party.

Also, when dealing with your vendors or employees, get them to sign a NDA. Your information is your asset.

4) Employee matters

If you have employees, make sure that there are employment contracts. If you have promised the employees something (e.g. equity), make sure you state it in writing. Ensure that you have been contributing to statutory contributions such as the Employee Provident Fund (EPF) and Social Security Organization (Socso).

This guide is a non-exhaustive basic guide and merely an idea on what you need to do before attracting investors. Do seek out advisers or mentors for help and advice. Get an experienced lawyer when dealing with terms and conditions. Speak to other fellow entrepreneurs who have done it before for advice.

Most importantly, do due diligence on your investor as well!

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4. General Privacy Policy
5. Simple Non Disclosure Agreement
6. Letter of Employment

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Symphony Light & Sounds Services Sdn Bhd & Anor v Irwan Shah Bin Abdullah @ D.J Dave & Ors

Kuala Lumpur High Court Suit No.: S-22-1010-2007

Plaintiffs initiated an action against Defendants for allegedly misappropriating their copyright by way of fraud and deception. The subject matters in dispute are proposals entitled “Malaysia’s 50 years an illuminating Journey”. The Plaintiffs alleged that the Defendants had secretly sent the subject matter to the Ministry of Culture, Arts and Heritage.

Plaintiff claims that their concept of “large format lightings, projections and special effects” for the purpose of outdoor audio visual performance is artistic works pursuant to the Malaysian Copyright Act 1987.

The High Court held that Plaintiffs failed to show evidence that such concept is their creation and it is original.

Case dismissed with costs to be taxed.

Download: [Judgement]

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AV Future Link Sdn Bhd v Inno Supply & Services Sdn Bhd

Kuala Lumpur High Court Suit Nos. D-22IP-61-2010 & D-22IP-60-2010

1. Plaintiff initiated claim for unlawful interference. Defendant counterclaimed for industrial designs (“ID”) infringement. The ID was obtained vide a deed of assignment from a Chinese company.
2. Plaintiff claims that the Defendant is not the rightful owner of the ID and that the ID had been disclosed before the priority date of the registered ID.
3. The High Court held that the challenge on the deed of assignment was not pleaded hence assignment is valid and the disclosure of ID in China is not relevant as the Malaysian Industrial Designs Act 1996 only recognises disclosure in Malaysia and no evidence is led to show disclosure in Malaysia.

Download: [Judgement]

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Registration of Copyright in Malaysia

The new Copyright (Amendment) Act 2012 provides for the voluntary notification of copyright. S. 26A of the Act states that a notification of copyright in any work may be made to the Controller by or on behalf of the author of the work, the owner of the copyright in the work, an assignee of the copyright, or a person to whom an interest in the copyright has been granted by licensee.

A notification of copyright shall contain the following particulars:

(a) the name, address and nationality of the owner of the copyright;
(b) a statutory declaration that the applicant is the author of the work, or the owner of the copyright in the work, or an assignee of the copyright, or a person to whom an interest in the copyright has been granted by licence;
(c) the category of the work;
(d) the title of the work;
(e) the name of the author and, if the author is dead, the date of the author’s death, if known;
(f) in the case of a published work, the date and place of the first publication; and
(g) any other information as the Minister may determine.

The Act changed the requirements of a statutory declaration for prima facie evidence of copyright. The new s. 42 provides that an affidavit, certified extracts of the Register of Copyright or statutory declaration made before any person having authority to administer oath by or on behalf of any person claiming to be –

(a) the owner of the copyright in any works eligible for copyright under this Act stating that-
(i) at the time specified therein copyright subsisted in such work;
(ii) he or the person named therein is the owner of the copyright; and
(iii) a copy of the work annexed thereto is the true copy thereof; or

(b) the performer in a live performance eligible for performers’ right under this Act stating that –

(i) at the time specified therein performers’ right subsisted in such live performance;
(ii) he or the person named therein is the performer; and
(iii) a copy of the document annexed thereto is the document which proves that he or the person named therein performed in the live performance,

shall be admissible in evidence in any proceedings under the Act and shall be prima facie evidence of the facts contained therein.

The Act was enforced on 1 March 2012 but the registration of copyright regime is not in place yet.

We spoke to the Intellectual Property Corporation of Malaysia and we have been informed that the registration regime will be in place in June this year.

[Postscript: The Malaysian Copyright (Voluntary Notification) Regulations 2012 which provides for the forms, fees and procedures for voluntarily notification of copyright is now in effect from 1 June 2012]

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Podcast: The Digital Edge 25: The #yorais mob

John Lim, Grace Chin, David Lian and Foong Cheng Leong discuss:

1. Mark Zuckerberg says that the age of privacy is over – so can Malaysians expect our status updates and Twitter feeds to be private?

2. Minister for Information, Communications, Culture and Arts Datuk Seri Rais Yatim says that Malaysians should not be too immersed in social networking sites, leading the Twitterverse to respond with #yorais

3. An upcoming proposed amendment to Malaysia’s copyright act looks to seek more control over digital content. Can we expect a day when new business models like this to come up in our country.

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Blog postings can backfire

First published on The Star Newspaper on 20 January 2011.

PUTIK LADA
By FOONG CHENG LEONG

Social media influence has hit court proceedings, with lawyers trolling blogs and Wikipedia in search of material that can help them argue the case for their clients.

LAST year brought further interesting development to social media and laws all around the world. Cases making references to social media tools saw an increase.

Social media was a tool for lawyers and litigants to help parties to fight their cases. Social media was also the cause of some parties’ mortification and incarceration.

In one High Court judgment last year, the judge recognised the publication of defamatory blog postings by a husband as one of the grounds to present a divorce petition before the expiry of two years from the date of marriage.

He also recognised that a defamatory statement in a blog posting operated in a borderless realm, and would continue to exist until the maker of the blog removed it.

The challenge against the constitutionality of S. 233 of the Communications and Multimedia Act 1998, the provision commonly used against Internet users, was dismissed by the High Court.

In this case, the defendant was charged with making disparaging remarks against the Sultan of Perak during the struggle between Barisan Nasional and Pakatan Rakyat. The court held, among other things, that the section did not impede freedom of expression. S. 233 is to ensure that the freedom given by the Constitution is exercised responsibly.

The use of Wikipedia as a reference is increasingly recognised in Malaysia, notwithstanding that the reliability of Wikipedia is questionable, as anyone can add or edit an entry in Wikipedia.

Nevertheless, the reliance on Wikipedia by our courts can be traced in reported cases as early as 2007.

Last year Wikipedia was referred to in Etonic Garment Manufacturing Sdn Bhd v Kunn-G Freight System (M) Sdn Bhd [2010] 1 LNS 13 (for the meaning of freight forwarder), PP v Murugan a/l Arumugam [2009] 1 LNS 1759 (for the meaning of atherosclerosis) and Thai Long Distance Telecommunication Co Ltd & Anor v Malaysian Maritime Dredging Corpo­ration Sdn Bhd (Kuala Lumpur Suit No: D-22-352-2005, for the meaning of chart datum).

Social media influence had also hit court room proceedings. It is common in Malaysia for people, in particular reporters, to tweet live from the courts. In the United Kingdom, the Lord Chief Justice issued a guideline for the use of live text-based forms of communication from court.

In this guideline, the Lord Chief Justice approved the use of Twitter for court reporting. However, in the US, certain courts ban the use of social media by juries.

In the US case of Romano v. Steelcase Inc, 2006-2233 (N.Y. Super. Sept. 21, 2010), Kathleen Romano sued Steelcase Inc for injuries she suffered after she fell off an allegedly defective desk chair manufactured by Steelcase Inc.

As a result of the fall, she claimed, she suffered restricted movement of her neck and back and “pain and progressive deterioration with consequential loss of enjoyment of life”.

In defence, Steelcase applied to access Romano’s current and historical Facebook and Myspace pages and accounts which are believed to be inconsistent with her claims in the action concerning the extent and nature of her injuries, especially for loss of enjoyment of life. The court granted Steelcase’s application.

Similarly, in McMillen v Hummingbird Speedway Inc, et al, Court of Common Pleas of Jefferson County, Pennsylvania, Civil Division, No. 113-2010 CD, Opinion on Defendants’ Motion to Compel Discovery (Sept. 9. 2010), the plaintiff sued the defendants for injuries suffered.

The defendants claimed that posts on the public portion of his Facebook page showed that he had exaggerated his injuries. The court granted the defendants access to the plaintiff’s private portion of his Facebook and Myspace account to determine whether or not the plaintiff had made any other comments which impeached and contradicted his disability and damages claims.

Closer to home, in a reported Industrial Court case, an employee claimed that she was forced by her employer to resign.

In response, her employer argued that the resignation was voluntary and they produced extracts of the claimant’s blog which showed the claimant had written about her feelings regarding her employment with the employer.

In it, she stated that she wanted to leave the company and admitted that she went for job interviews as she had already decided to go away.

The Industrial Court chairman relied on the blog entries to find that the employee had intended to leave and found that she had gladly tendered her resignation to take on new employment.

In Australia, a hairdresser won compensation for wrongful dismissal after losing her job for making unflattering remarks about her employer on her Facebook.

In Miss Sally-Anne Fitzgerald v Dianna Smith T/A Escape Hair Design [2010] FWA 7358, Commissioner Michelle Bissett for Fair Work Australia said that posting comments about an employer on a website (Facebook) that can be seen by an uncontrollable number of people is no longer a private matter but a public comment.

It would be foolish of employees to think they may say as they wish on their Facebook page with total immunity.

This year brings another exciting watershed to Malaysia’s social media legal sphere. The Personal Data Protection Act 2010, which governs the processing of personal data, is pending enforcement.

Proposed amendments to the Copyright Act 1987 have been drawn up in the form of a Bill to exempt Internet service providers from liability for copyright infringement under certain circumstances.

The Bill also empowers the court to order an Internet service provider to disable access to infringing material.

Furthermore, the so-called Internet Service Providers Liability Act may be passed to compel Internet service providers to take action against their users if they download songs or movies illegally.

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Internet Service Provider Liability Act: Do we need one?

An analysis of the potential repercussions of the proposed Internet Service Provider Liability Act.

Recently, The Star reported that the Malaysian Parliament will be tabling the ISP Liability Act (”Act”). According to The Star, the Act makes internet service providers (ISPs) responsible for curbing online piracy. The ISP will be fined if they don’t take action against illegal downloaders.

The ISP will send two warning letters to illegal downloaders. Should the downloaders persist, their internet access will be suspended or even terminated.

It is unclear at this juncture on how far-reaching the Act would be. Will it cover all methods of downloading copyrighted materials, such as music and movies, or only through P2P file sharing software? If a user streams videos or music through a website, would they be caught under this Act? Technically in such case, there is a download of copyrighted materials into a user’s computer.

It is also unclear at this juncture on how the Act would require ISPs to monitor their users’ activities. Are they compelled to keep track of all their users’ internet activities? Or would there be a need for active participation of intellectual property rights (IPR) holders to tell the ISPs that certain IP addresses are infringing their rights, so that the ISPs can reveal the users’ details?

How it works

Making ISPs responsible for their users’ actions is not something common. Jurisdictions such as United States of America and United Kingdom have laws in place to compel ISPs to take action their users.

In some jurisdictions, IPR holders would engage a third party to monitor the internet to see whether anyone is sharing copyrighted files online. If they detect someone, they will obtain the IP address, and thereafter pass it to the relevant ISPs for them to take action against their user. If the user persists notwithstanding that warning letters have been issued, the ISPs may suspend or terminate the user’s internet access.

This is also commonly known as graduated response, or in another words the “three strikes rule”.

Repercussions

It is argued that such a law would curb online piracy. Thousands of people are dependant on the music and movie industries, and online piracy is affecting these industries severely. I do not deny that online piracy has affected these industry, but the objective of this article is to show that the repercussions of such a law are severe to internet users.

What has happened in jurisdictions containing such a law is a good indication on where the implementation of such a law will take us.

In many cases, IPR holders take additional steps against alleged online infringers. IPR holders would normally request for the identity of the internet user (normally after obtaining a Court order) from the ISPs. Some ISPs are ready to divulge such information, whereas some ISPs put up a fight. Once the identity of the user is revealed, the IPR would initiate action against the user and such active enforcement has caused terrible impact on users.

In the United Kingdom, it was reported that IPR holders will send a letter to illegal file sharers demanding payments of between GBP500 and GBP700, failing which the file sharer will be brought to Court. In the United States, a lady decided to fight it out with the recording industry instead of settling out of Court after being accused of encouraging the illegal sharing of songs. She lost the case, and was fined US$220,000. It is a classic case of David against Goliath.

Such a law will also affect internet users who do not know that their internet connection has been piggy-backed by third parties. There are many cases where users do not know that someone has used their internet connection — especially those with unsecured Wi-fi connection — and subsequently receive a demand letter for an offence they did not commit. This happened to a 78 year old man in the United Kingdom, who received a demand letter from a lawyer accusing him of downloading pornography. The 78 year old man didn’t even know what file-sharing was!

At this juncture, we do not know whether the Act would provide for a defence of innocent infringement. But the fact that one can receive a demand letter from lawyers for something that one has not done is quite frightening.

Children are now exposed to the internet at very young age. They may not know that their act of sharing and downloading music or videos will cause serious repercussions to them. A child would obviously choose to download the latest single of Justin Bieber from the internet instead of begging and pleading with his or her parents to buy it. One would argue that we ought to teach our children against online piracy. But all parents know that not all of their advice is always heeded.

In Singapore, it was reported that Odex Pte Ltd, a distributor of Japanese anime in Singapore, had issued demand letters to children as young as 9 years old accusing them of illegal downloads. Further, in the United States, 16 year old Whitney Harper was sued by the recording industry after she was found sharing music via a P2P file sharing program. She claimed that she didn’t know the program she used was taking songs from the internet illegally. Notwithstanding that, judgement was entered against her.

The enactment of the Act would also be another deterioration of our (almost non-existence) privacy rights. Malaysian laws do not recognize invasion of privacy rights as an actionable wrongdoing (see Ultra Dimenson Sdn Bhd v. Kook Wei Kuan [2004] 5 CLJ 285; Dr Bernadine Malini Martin v MPH Magazine Sdn Bhd & Ors and Another Appeal [2010] 7 CLJ 525; and Lew Cher Pow @ Lew Cha Paw & 11 yang lain lwn. Pua Yong Yong & Satu Lagi [2009] 1 LNS 1256) except in very limited circumstances (Maslinda Ishak v. Mohd Tahir Osman & Ors [2009] 6 CLJ 655).

ISPs are the “guardians” of our rights of privacy. They hold the key to our identity in the internet. Our identity, surfing habits and internet activities are our personal data and ISPs ought to give priority of such data over commercial interest of others.

By giving access to our personal data to third parties, our privacy is at risk, and such a risk is real. Recently, ACS:Law, a law firm specialising in taking action against file sharers in the United Kingdom, had accidentally divulged information of thousand of broadband users who were accused of illegal file sharing. The information that was leaked were unencrypted Excel spreadsheets, listing the names and addresses of people that ACS:Law had accused of illegally sharing media. One contained details of customers whom they had accused of illegally sharing pornography!

In light of the ACS: Law case, some ISPs in the UK resist efforts to divulge customer details to IPR holders. I urge the same is followed by our local ISPs in order to protect internet users’ privacy.

It should be remembered that customer data is protected under the upcoming Personal Data Protection Act 2010, which provides for a fine or imprisonment or to both in the event of a breach.

Lawyers appointed to act for IPR holders should also be vigilant when dealing with internet users. Solicitors who had been representing IPR holders were subject to public humiliation and harassment by internet users.


A partner of ACS: Law, one of the main targets.

Assuming that the Act would push through in any event, I urge our local ISPs to only take action or to provide customer information to IPR holders if they are satisfied that –

1. there is strong evidence to show infringing act has been committed by user, if possible only provide information if infringement is on a large or commercial scale or for commercial gain;
2. the requester’s storage system is secure, and they have given an undertaking that information will be kept securely e.g. encrypted;
3. the requester will only use that information for the purpose of pursuing legal action only and not to published it anywhere else; and
4. the requester is compelled to give access to the information obtained from ISPs to customers to ensure that a fair case can be fought.

Closing

I am not a file sharing advocate, and I do not condone internet piracy. I am only seeking to raise awareness of the repercussions of such a law. I hope what I have mentioned above is considered by the law and policy makers.

I would like to express my gratitude to David Wang of Blogjunkie.net for raising this issue on his blog.

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Quick, throw your CDs away! There’s a roadblock!

First published on LoyarBurok on 2 November 2010

For the past few months, an email has been circulating alleging that police and the enforcement division of the Domestic Trade and Consumer Affairs Ministry’s (now the Ministry of Domestic Trade, Co-operatives And Consumerism) have started operations to search and fine anyone who keeps pirated discs inside their cars. The email alleges that these operations were carried out through roadblocks at main roads and expressways, and that persons caught in possession of pirated discs were fined RM400 per disc.

In fact, these stories have been circulating for some time now. A report in the Sun newspaper in April 2009 stated that the police set out roadblocks to nab anyone with pirated discs. However, the same report stated that the Ministry denied having such roadblocks being set up.

Whether or not such roadblocks have been set up, it leaves us with the question: Do the police or the Ministry have the power to search our vehicles for pirated discs?

Section 24 of the Police Act 1967 allows any police officer to stop and search without warrant any vehicle which he has reasonable grounds for suspecting is being used in the commission of any offence against any law in force. The Ministry has also authority to enter and search a vehicle without warrant provided that he has reasonable grounds for believing that delay in obtaining a search warrant would lead to the destruction of evidence.

Under section 41 of the Copyright Act 1987, it is an offence to possess, other than for private and domestic use, any infringing goods. Any person who has in his possession, custody or control three or more infringing copies of a work or recording in the same form is presumed to be in possession of such copies otherwise than for private or domestic use. This basically means that possession of a pirated disc for private and domestic use is allowed provided that the pirated disc do not exceed three or more copies of the same form.

The offence would attract a fine not less than RM2,000 and not more than RM20,000 for each infringing copy or imprisonment for a term not exceeding five years or to both.

Can the police or the Ministry stop and search your vehicle?

In short, for now, if the police or Ministry have reasonable grounds to think that you are distributing pirated goods, (e.g. if you’re suspected to be a pirated VCD/DVD seller), they can stop and search your vehicle. Otherwise, they have no authority to stop and search your vehicle for pirated discs.

This situation may soon change.

The Government recently announced plans to amend the Copyright Act 1987 to make it an offence to keep pirated goods, similar to the offence of possessing stolen goods. Although the Government has not announced the details of the amendment, such news is worrying. This basically means that anyone in possession of pirated goods is committing an offence. Hence, any police, with reasonable grounds that there are pirated goods in a vehicle, may stop and search the vehicle.

What if the driver had purchased genuine songs from the internet and had it copied into a CD? The driver would have to prove and explain that he had genuinely purchased the song.

If I had downloaded software, music or movies into my computer from the Internet, does the police or Ministry has the authority to enter my house and search my computer? Based on the proposed amendment, the police or Ministry has the authority to do so.

Guidelines to allow the authorities to stop and search a vehicle for pirated goods should be clearly spelled out and made available to the public. The public should be given the right to use or copy copyrighted materials for their private use. Certain levies or exemptions should be given to the public if they are in possession of pirated goods unintentionally.

An outright ban of unauthorised possession copyrighted materials will create fear and chaos to the country and society.

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