Proprietary file formats and the law

[mattster]

This might be better off in legal but..

Background
I sell a software product (Windows application) that processes data that has been recorded using a third-party's hardware product.
This data is stored in a proprietary (non-public) binary format.
I have been selling this product for over ten years.
The company that produces the hardware has been aware of my presence in the market for all, or nearly all, of this time and been in contact with me for much of it (contact originally initiated by them).
Relations have always been friendly (they have often been helpful, although have never explicitly provided information about the file formats in question), and I have been told in the past that the company considered that the existence of my software was at least somewhat helpful in driving their hardware sales.

The bottom line: my software, and software from some other small companies, uses data from this hardware to do something useful, and something which the company itself did not offer. This was mutually beneficial.

Today
This company now offers its own software product (online, expensive) to provide much of the functionality that small companies like mine had done over the years.

My friendly company contact has left and a new division head is in place - who just so happens to have been the driving force behind the new software offering above. This guy contacts me to ask whether we have an existing licensing agreement in place to read the proprietary formats from their devices as he is doing some “housekeeping” and can’t find one (I’m pretty sure that he knows the answer is “no”). I answer in the negative. This was about a month ago.

A couple of days ago I receive another email from the division head, with contract/licensing agreement attached for me to sign and return.

The agreement is horrible, terms include:

• Acknowledge their rights over the proprietary file formats.
• Revocable at any time – they can effectively put me out of business at the stroke of a pen (I suspect this is the plan).
• I can’t develop or release any new features for my software without their approval, and specifically can’t add a couple of features that they currently have that I don’t.
• I am to provide information (historical and going forwards) on number of licenses sold by geographical location.

In return I get nothing other than the continued use of the file formats until such time as they decide otherwise. It is not signable in its current form, and I assume they must know that.

Questions
What to do? Although the law is not as clear cut as it could be, I believe that reverse engineering and reading a (relatively simple) binary file format for purposes of interoperability with other software is perfectly legal without any sort of permission from the format “owner” and so signing this contract would give me nothing, in exchange for rather a lot.

Is this a case of a big company being able to crush a small company through legal costs even if their legal basis for doing so is suspect, or is that fear overblown?

Can anyone recommend a lawyer that might have some experience in this rather niche area? I would like to take some legal advice to find out exactly where I stand.

For some further background, this product used to be my main source of income but isn’t any more. It has been on the decline for a while, and I now contact full time in a completely different business area. Product does still bring in some useful cash however, so I would like to keep it going for as long as possible.

Thanks for reading!

[northernladuk]

This might be better off in legal but..

So why didn't you put it in there?

IMO you need to do a business plan to work out what this is worth to you and what your pot for fighting this is. Any kind of legal fight is going to be very expensive, particularly if the sole aim is to get rid of you by stealth. They'll just string it out on until you are out of money. At least with a projected finances and plan you'll know what your options are and appetite to take it as far as it needs.

Then have a quick chat to a lawyer for their opinion. I'd image the answer won't be anything you want to hear, both on a possibilities and cost level. With your plan and the lawyers info you should have a pretty clear direction to follow.

[SueEllen]

You've not indicated what countries your software is used in as different legal jurisdictions have different laws.

[ladymuck]

So...

A piece of hardware generates (for sake of argument) some form of log file in a proprietary format that you've been able to decode and produce useful output from.

I presume if you weren't selling your solution the company wouldn't know or care that you exist. It seems to me that they feel they are losing revenue and so want to shut you down.

Does the hardware come with terms and conditions regarding how it, and any output it generates, can be used? Does your processing of the file contravene (or comply) with those T&C's?

That would be my starting point but IANAL

[cojak]

As a non-expert in any of this Mattster, my first thought is to get the company to buy you out for what you would consider to be a reasonable sum and they would consider loose change. Basically something is better than nothing, and it sounds as if this particular golden goose will shortly be cooked…

[Lance]

As a non-expert in any of this Mattster, my first thought is to get the company to buy you out for what you would consider to be a reasonable sum and they would consider loose change. Basically something is better than nothing, and it sounds as if this particular golden goose will shortly be cooked…

Came here to write this ^^^^^^^^^

If they are going to do the same, then their choices are to buyout, or make it themselves.
These clauses are quite possibly just a starter to devalue the company before they buy it for a snip.

My advice would be to have an adult conversation with the right people. Make sure they know that the clients you have in common value your input and it would be for the best if everyone is happy.
The big company only want to make money, and forcing a small company to close isn't a goal, it may just be a route to a goal. So provide them a better route...

At the end of the day, you have some I.P. they don't have. That should be worth something to them.

[TheDude]

Can you copyright a file format?

If so why can Google docs and open office write word documents?

[Lance]

Can you copyright a file format?

If so why can Google docs and open office write word documents?

because Microsoft use Open XML format

Open XML Formats and file name extensions - Microsoft Support

[mattster]

Can you copyright a file format?

If so why can Google docs and open office write word documents?

This is an interesting question and the answer would appear to be "no" in most jurisdictions, but there is nuance. e.g. (as LadyMuck alluded to) were there Ts&Cs to prevent reverse engineering etc (in my case since I didn't reverse engineer but "found" the format specification on the web, this would not apply), aso some stuff around patents, DMCA etc. The simple fact is that this company wouldn't sue Microsoft over this issue because they would lose, but they could very well sue me. Whether or not it is really the case that a large company can finish off a smaller one by using what is essentially a malicious prosecution I don't know. In any case there is probably enough lack of clarity around the law here that some sort of case could be made. Whether or not having tolerated (and even encouraged) me for a decade would play into any decision I don't know either.

Much of the above is by the by in any case, because if they really want to get rid of me all they need to do is change their file format to something completely impenetrable and I'm done. This is exactly the sort of operational risk that fed into my decision to step back from this project some years ago, because I knew sooner or later the game would be up as the hardware manufacturers got into the software side of things (I support multiple vendors). It's been a decent run.

As for selling up - I'd love to, and probably for less than they would imagine. I rather suspect they think our business is more profitable than it is. Although in this case the company has already built their software offering, no doubt I'd have stuff of use as well as a several thousand strong customer list etc. The contract actually contains a clause to give them first refusal on IP purchase from me (at an agreed price) should we dissolve, so perhaps they are thinking something similar. The truth is for the right offer (say 1-2 years rev) I'd bite their arm off - I am really over supporting this software although it was fun to start with.

[Paralytic]

This guy contacts me to ask whether we have an existing licensing agreement in place to read the proprietary formats from their devices as he is doing some “housekeeping” and can’t find one (I’m pretty sure that he knows the answer is “no”). I answer in the negative. This was about a month ago.

I hope the above (my bolding) is not the undoing of this - I'd not have admitted there was no existing licensing agreement and would have sought advice before responding. If i felt the need to respond, I'd have stated there was a verbal agreement and put that into words for them to sign, as an indicator of the agreement you had with the previous incumbent of the role.

As for where you are now, you could obviously contact a lawyer now, or test the waters and say you can't sign the agreement as they have put it to you and suggest changes -(you're now in negotiation with them). Their response to that will tell you a lot - are they willing to negotiate, or will they try go down the cease and desist route.