A variety of resolution frameworks are available to businesses involved in a software license dispute. An audit is the most common such framework and entails an analysis of the organization’s network for software installations compared against its licenses. The types of audits initiated by software publishers and trade associations include self audits, independent audits, software asset management (“SAM”) engagements, and publisher-staffed audits.

Self Audits
Self audits are the least disruptive of all software audits. They are a mechanism often employed by trade associations acting on behalf of software publishers. The trade associations, and in some instances, the publisher itself, requests that the target company conduct a self audit and report the results of the audit to the trade association or publisher. Companies that agree to conduct a self audit must inventory the applicable software on the computers within the scope of the audit and report the number of installations, the number of licenses, and the number of license deficiencies.

When evaluating whether you should cooperate or litigate after a request for a self audit, you should consider the benefits of a self audit compared to the other types of audits. For instance, in publisher and third-party audits, you usually have a contractual obligation to participate in the audit and provide information to the auditors. When conducting a self audit, you have some control over the timing of the audit and the allocation of resources. That flexibility is not always present in other types of audits.

Additionally, outside auditors are not always required to be impartial and may submit incomplete or inaccurate audit results. For these reasons, regardless of the type of audit requested by the software publisher, companies faced with an audit should request the opportunity to provide a self audit rather than an independent audit, a publisher-staffed audit, or (usually) a SAM engagement.

Independent Audits
An independent software audit involves the use of a third-party auditor to gather the facts
relevant to the dispute. This audit method may be the most costly and time consuming option for the audit target.

Many software licenses incorporate audit provisions allowing the software publisher to request an independent audit. Such provisions must be carefully analyzed to determine the potential business impact of the audit and liability that may result from the audit.

In an independent audit, the organization has no input into the selection of the auditor, how long the audit will last, or the scope of the materials the auditors may review. The target company must also bear the costs of the audit if the auditor finds a licensing discrepancy of more than 5%. If the auditors conclude there is a discrepancy, the publisher has the contractual authority to unilaterally determine the license price for the software necessary to become compliant. Independent audits have significant business impacts and should be avoided if possible. Nonetheless, independent audits are preferred over SAM engagements and publisher-staffed audits because the auditor is usually ethically obligated to remain independent.

SAM Engagements
SAM engagements are also conducted by third-party auditors or consultants, but there is no obligation that the auditor in a SAM engagement be independent. The software publisher requests that the target allow a third party to audit its software installations and report the results directly to the publisher. In these engagements, the publisher pays the auditor, and the target is required to purchase licenses to cover any deficiencies in its software licenses. Microsoft’s SAM engagement has been extensively used in lieu of traditional software audits with mixed reviews from the end user’s perspective.

Participation in a properly managed SAM engagement may be in the client’s best interest
because such engagements typically provide some flexibility and a lower total cost of resolution than self audits and independent audits. In many instances, the publisher seeks no compensation for alleged past infringements in exchange for an agreement to come into compliance on a go-forward basis.

Publisher-Staffed Audits
Publisher-staffed audits are the most intrusive and least impartial of all software audits. In these audits, the publisher’s employees collect information relevant to the dispute. In many instances, publishers request a company’s confidential information or access to a company’s network to conduct the audit. Although a publisher may arguably have a contractual right to request that it be allowed to examine its customers’ computer network, it is never advisable to agree to a publisher-staffed audit without examining all of the alternatives first.

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Software copyright infringement litigation (sometimes called software anti-piracy claims) comes in an array of varieties. Frequently, it is functionally indistinguishable from disputes involving literary or audio-visual works and centers on claims that an infringer copied a copyright owner’s work and then sold that work as the infringer’s own in pursuit of an undeserved profit. Software licensing and counterfeiting disputes comprise the majority of such claims and are very common in light of large publisher and trade group initiatives aimed at enforcement in these areas. Moving across the spectrum of complexity, because software is almost universally distributed under a licensing regime, rather than sales of copies, many other actions involve claims that a defendant used software outside the scope of the relevant license and thereby infringed the copyright. These matters usually require a more nuanced approach by a reviewing court, because they require a determination of whether the actions or omissions at issue constituted use outside the scope of the license – and therefore copyright infringement – or merely breaches of independent license terms, for which the plaintiff must seek damages, if any, in contract law.

However, a third class of software copyright litigation – what might be labeled “competing works litigation” – typically requires substantially more effort from the parties and the tribunal than either of the above types of disputes. In these cases, the developer or owner of one program complains that a different product created or distributed by the defendant consists, in whole or in part, of the work in which the plaintiff holds the copyright. These cases on average involve significantly higher stakes than other software copyright disputes, in that they can threaten the defendant with elimination of an entire line of business or even, in some cases, with the cessation of business operations altogether. The legal analyses and factual development in such matters can approach the level of complexity usually associated with patent disputes, and, indeed, many of the considerations in such matters likely would be familiar to dedicated patent law practitioners.

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If a dispute is able to move past the question of whether the software at issue is eligible for copyright protection, the claimant will need to be prepared to present a prima facie claim of infringement. The Copyright Act and relevant case law do not distinguish between software and other copyrightable works for the purposes of setting forth the requirements of a claim. To establish a claim for software copyright infringement, a plaintiff must show (1) ownership of a valid copyright; (2) factual copying of the code or documentation; and (3) substantial similarity between the software applications. 

The developer of a software application acquires a common-law copyright interest at the time the software is published, unless the developer has entered into an agreement assigning the interest to another party. The filing of a certificate of registration creates a rebuttable presumption of the validity of a copyright and of the facts contained in the certificate regarding ownership. However, the fact that software is often developed through subcontractors or using a collaborative approach may complicate the analysis. In some cases, for example, the “work made for hire” doctrine may control the question of who legally owns the software.  Under this doctrine, “the employer or other person for whom the work was prepared is considered the author” of a “work made for hire” and owns the copyright, absent an agreement between the parties to the contrary. The Copyright Act defines a “work made for hire,” inter alia, as “a work prepared by an employee within the scope of his or her employment…”  The Supreme Court has held that general principles of agency law apply when deciding if a work was prepared by an employee rather than an independent contractor.  If an alleged infringer was an employee of a copyright owner when he or she developed software and/or documentation, it will be presumed that the works belonged to the employer for purposes of the Copyright Act. The alleged infringer then would have to prove the existence of a written agreement signed by both parties under which he or she retained ownership rights.    

Whether you are an employer or an employee, if you have a question about the work-for-hire doctrine, you should contact experienced counsel to assist you.

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Software copyright plaintiffs typically seek both permanent injunctive relief as well as damages. Recovery of statutory damages under 17 U.S.C. § 504 often hinges on whether the copyrights claimed to have been infringed before or after discovery of the alleged infringement. However, plaintiffs in competing works litigation typically seek an actual damages award, because a potential actual damages recovery often is greater. In addition, the marginal costs of developing the necessary factual record to support an actual damages award are not significant, because the underlying elements of the claim already require the devotion of significant time and effort to evidence collection and presentation. Under 17 U.S.C. § 504, a plaintiff may recover the actual damages it suffered as a result of the infringement or any profits of the infringer attributable to the infringement.  Under 17 U.S.C. § 504(b), the plaintiff could recover any profits of the infringer that are attributable to the infringement. Under the statute, “in establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” Those damages could be substantial, depending on the amount of business and profit the plaintiff is able to demonstrate is attributable to use of its works. Claims for attorneys’ fees also usually are the norm, though, again, recovery may depend on whether the copyrights at issue were registered before or after discovery of the alleged infringement.  Costs also may be recoverable.       

Competing works cases often involve one or more primary, individual alleged infringers as well as the corporate entities with which they are associated. If the plaintiff is able to establish any actual damages as a result of infringement, all defendants could be held jointly and severally liable for those damages. In addition, the plaintiff in the action may seek to hold the individual defendants liable for the “profits” they made independently as a result of the alleged infringement. Specifically, the plaintiff could attempt to recover a portion of the individuals’ income earned while developing and/or selling the competing work at issue. 

If you have received a notification from a copyright owner who is seeking damages against you, you should contact experienced counsel to preserve your legal rights.

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It is common for content developers to contract for the assistance of others to help develop copyrighted works. It is very likely almost as common for those content developers to want to include language in those contracts that allows them to retain full ownership of the copyright in the resulting works. Where an assisting party is working as the employee of a developer, the resulting work is generally held automatically to be a “work made for hire” under the Copyright Act, with copyright vesting in the employer-developer. However, when there is no employer-employee relationship – with an assisting party acting instead as an independent contractor – it is common for the contract between the parties to include an express provision specifying that the resulting work is a “work made for hire.” In many cases, though that is insufficient.

In order for a work-for-hire clause in a written contract (and there must be a written contract) to be effectual, the resulting work must fall into one of nine enumerated categories in the Copyright Act: (1) contribution to a collective work; (2) part of a motion picture or other audiovisual work; (3) translations; (4) supplementary works; (5) compilations; (6) instructional texts; (7) tests; (8) answer materials for tests; or (9) an atlas. Thus, in many cases, even where both parties may believe at the outset that a work to be developed is to be the copyright asset of one party, that intent may be thwarted if it cannot be shown that the work at issue does not fit within the scope of the works that can be considered to be “made for hire” under U.S. law.

Sometimes, gray areas in the fact-pattern of a subsequent copyright dispute can be used to a plaintiff’s advantage to convince a court that the work was, for example, a supplementary work or a compilation, each of which is described with some definitional wiggle room within the statutory text. Litigation is rarely a sure thing, though, and almost never a good basis upon which to build one’s expectations for future enjoyment of a copyright. For this reason, it is vital for developers to include in their contracts with independent contractors not only an express work-for-hire clause, but also an express, contemporaneous assignment of all rights and interests in any resulting work from the independent contractor to the developer. This typically will help to avoid unpleasant surprises for the developer.

Conversely, it is equally important for contractors interested in retaining the rights to their works of authorship to carefully review the terms of a contract offered by a potential client. In close cases, or whenever it appears there is a potential for a difficult negotiations process, it is often desirable for both parties to engage the assistance of counsel to craft contract language that accurately conveys the true intent of the parties within the parameters of applicable law and precedent.

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Most BSA Audits begin with a report from a disgruntled employee or former employee. The Business Software Alliance maintains telephone hotlines and a web site to encourage disgruntled employees and vendors to make anonymous reports against companies of all sizes. The BSA dedicates a substantial portion of its revenue marketing on radio stations and the internet to these "rats," promising them confidentiality and the ability to make an anonymous complaint. The current ad on Google reads:

BSA - Official Site

www.BSA.org/reportpiracy Earn up to $1 million for Reporting Pirated Software - All Confidential

The Business Software Alliance investigates all reports of software piracy without confirming the veracity of the information provided or the motive of the person making the complaint.

Once a report is received, the Business Software Alliance makes a decision about whether to request a self-audit or to immediately file suit. In the overwhelming majority of cases, the Business Software Alliance pursues the self-audit approach. Acting either through an internal enforcement attorney or an outside law firm, the BSA will send a letter to the target company requesting a self-audit. The request for an audit is a critical stage in the process, and the time when an experienced attorney can help your business the most.

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Preparing the BSA Audit Materials

The Business Software Alliance’s primary enforcement tool is to send a threatening letter indicating that an investigation has commenced and offering to forego litigation if the target company provides a self-audit. A self-audit consists of a listing of all BSA member software running on a company’s computer networks, appropriate indicia of ownership for the software comprised of dated proofs of purchase for each title. It is important to note that companies are usually under no legal obligation to cooperate with the Business Software Alliance. In most instances, however, cooperation will yield the most cost effective resolution. But, that is not necessarily always the case.

Cooperating Carefully with BSA

I usually advise my clients to cooperate with the BSA, but to do so without compromising any legal rights. Prior to submitting audit materials on behalf of clients we require that the BSA sign a contract protecting the confidentiality of the audit materials and ensuring that the audit materials will not be used in court if the case cannot be settled informally.

BSA Settlement Demands

The Business Software Alliance has developed a standard formula for assessing fines as part of its settlement process. It is important to note that the BSA is not a governmental entity and has no independent authority to levy an enforceable fine. Business Software Alliance fines are therefore merely offered in settlement to avoid litigation and, like all pre-litigation settlement offers, are negotiable with the help of experienced counsel.

The BSA's methodology for calculating fines starts by treating as unlicensed all software products for which there is a lack of adequate documentation, including dated proofs of purchase. All proofs of purchase must be dated prior to the Business Software Alliance's initial letter to be considered valid evidence. Because companies may not always have access to the requisite dated proofs of purchase, the BSA's proposed fines are often based, in part, on software titles that companies legally own and properly acquired.

The Business Software Alliance also unbundles the products in software suites such as Microsoft Office and Adobe Creative Suite. So instead of proposing a fine based upon one copy of Microsoft Office, the BSA proposes a fine for Microsoft Outlook, Microsoft Word, Microsoft Excel, and Microsoft PowerPoint. The result is a proposed fine of $1,126 for a product that retails for $339.

After disallowing credit for valid software without dated proofs of purchase and unbundling all software suites, the Business Software Alliance then applies an arbitrary multiple of three times the full retail price for each software title. Accordingly, one allegedly unlicensed copy of Microsoft Office will carry a proposed fine of $ 2,252.

To add insult to injury, the Business Software Alliance’s proposed fine will include a line item for $3,500 to pay the BSA’s attorney’s fees. While this is not usually a large number as a percentage, it should be taken into account when considering potential exposure. To calculate your potential exposure, use our Business Software Alliance Fine Calculator, http://www.bsadefense.com/resources-fine-calculator.asp.

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Many product manufacturers understandably want to be able to exercise some control over the prices at which their products are sold to consumers. For manufacturers that produce and sell all of their new merchandise internally, price control is a non-issue, because pricing decisions may be revised at little more than the flip of a switch. However, this is a comparatively rare scenario. Most manufacturers rely, at least in part, if not entirely, on a network of wholesalers and retailers to distribute new merchandise to end users. Historically, in this type of arrangement, many manufacturers have relied and continue to rely on price maintenance agreements (PMAs) with their channel partners to specify the minimum prices at which the partners may offer the manufacturer’s merchandise for sale. Often, the motives for requiring compliance with PMAs is entirely consistent with good business practices, in that such agreements can facilitate competition among authorized resellers while protecting a brand’s image against what may be a perceived stigma associated with “bargain” products. However, PMAs also can be vehicles for anticompetitive practices, and many manufacturers have faced civil liability under the Sherman Act for agreements that courts have found to be unreasonable restraints on trade. Knowledge of how to implement an effective, legal PMA, therefore, can be an important asset.

Pricing agreements come in two principal flavors: vertical – agreements between players at different levels of the supply chain – and horizontal – agreements between players at the same level of the chain. Horizontal agreements typically are more difficult to justify, because they often run the greatest risk of embodying the sort of anti-competitive “price fixing” schemes that the Sherman Act is designed to prohibit. Courts often consider such agreements to be per se unreasonable restraints on trade, “conclusively presumed to unreasonably restrain competition without elaborate inquiry as to the precise harm [they have] caused or the business excuse for [their] use.” Toledo Mack Sales & Service v. Mack Trucks, Inc., 530 F.3d 204, 221 (3rd Cir. 2008).

However, courts most often analyze PMAs and other vertical agreements pursuant to a more searching inquiry, often termed the “rule of reason.” Under this model, the judge or jury reviews all of the facts and circumstances of a case in deciding whether a pricing agreement should be prohibited, often looking to a number of prescribed factors, including: whether there existed an actual conspiracy or agreement among several defendants to set prices; whether a conspiracy or agreement produced adverse, anti-competitive effects within relevant product and geographic markets; whether the objects of or conduct supporting a conspiracy or agreement were illegal; whether a plaintiff was actually injured as a result of a conspiracy or agreement; whether the impetus for the agreement came from the lower levels of the supply chain (e.g., from the retailers or wholesalers, as opposed to the manufacturer); and whether the party insisting on the pricing agreement has significant market power (i.e., “the ability to raise prices above those that would prevail in a competitive market”). Id. at 226.

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Businesses reviewing their price maintenance agreements (PMAs) for compliance with anti-trust law should do more than assess whether their agreements would be treated as “horizontal” or “vertical” by a reviewing court. (More on that subject is available here).

It is also important to keep in mind a few additional points when reviewing an existing or contemplated PMA. First, the Supreme Court has held that “the antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result.” Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705, 18 (2007). Thus, to a point, courts generally consider brand-specific PMAs to be less of a threat than other types of agreements affecting products from multiple manufacturers: “[E]xcept when [resale price maintenance] spreads to cover the bulk of an industry’s output, depriving consumers of a meaningful choice between high-service and low-price outlets, most [resale price maintenance arrangements] are probably innocuous.” Id. at 2719 (citing F.M. Scherer & D. Ross, Industrial Market Structure and Economic Performance 558 (3d ed. 1990)). In addition, the fact that a manufacturer also may play a role at the same wholesale or retail level in the supply chain as the businesses with which it enters into PMAs likely does not mean that those agreements are subject to a potential per se reasonableness analysis often applied to horizontal agreements – where a manufacturer enters into a PMA with a reseller, that PMA likely will be reviewed under the rule of reason. See International Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 906 (6th Cir. 1989). However, to the extent that a vertical PMA is implemented in order to support an illegal, horizontal agreement among resellers, that PMA, even though remaining subject to the rule of reason, nevertheless will be more likely to be found to be an unreasonable restraint on trade.

It is vital that businesses contemplating the implementation of a PMA consult with counsel before proceeding with any contemplated agreement. Sherman Act liability can be significant, not only in terms of monetary damages awarded at trial, but also in terms of less tangible damage to a business’ brand or reputation. A knowledgeable attorney will be able to let you know when a proposed PMA is likely to be within the scope of permissible agreements, when it is in need of revisions, either in terms of substance or implementation, and when it should be avoided altogether, under the circumstances.

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A Chicago resident’s use of Twitter, the online social networking service, has prompted the resident’s former realty management company to file a lawsuit against the resident.

Horizon Group Management LLC (“Horizon”) filed a libel lawsuit Monday, July 27, 2009 against former tenant Amanda Bonnen alleging a Twitter post she “maliciously and wrongfully” published contained false and defamatory information regarding Horizon and her former apartment.

Ms. Bonnen allegedly posted the following message on her Twitter account: “Who said sleeping in a moldy apartment was bad for you? Horizon realty thinks it's okay.” Horizon alleges that Ms. Bonnen’s account is public and accessible throughout the world via the Internet and that Ms. Bonnen’s Twitter post greatly injures Horizon’s reputation as a landlord in Chicago. Horizon has requested $50,000 in damages.

On July 28 Horizon published a press release indicating the libel suit is related to a class action Ms. Bonnen filed related to Chicago Residential Landlord Tenant Ordinance violations. Horizon discovered Ms. Bonnen’s Twitter post during the course of its due diligence investigation for the class action lawsuit.

An alternate approach for a business in Horizon’s position that is interested in mitigating negative publicity in online media would be to aggressively promote a positive message regarding their brand and their products or services. Businesses can launch blogs or ad campaigns to counteract negative comments made on the Internet with the goal of ensuring the positive messages appear higher in Internet search results than negative messages. Depending on the content of negative messages, additional remedies may be available including DMCA takedown notices, copyright infringement actions, or trademark infringement actions.

If your business is the victim of negative electronic advertising from third parties, you should retain counsel experienced in protecting business’ rights and brands.

To view the complaint, click here.

To view the subsequent press release, click here.

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Managed service providers (MSP) should carefully review their subscriber contracts to confirm the contracts do not weaken the MSP’s marketability if the MSP owner wants to sell the business.  A managed services agreement that allows the subscriber to cancel the agreement at any time and with no penalty will devalue the MSP because the MSP will not have a guaranteed revenue stream.  With no guaranteed revenue, potential buyers will be less interested in purchasing the MSP.

Managed services agreements that assign all intellectual property rights related to the service contract to the subscriber weaken the strength of the contract.  Rights to any software, processes, or marketing materials developed by the MSP under the agreement would belong to the subscriber.  The MSP will have forfeited a potentially substantial revenue stream from licensing agreements with licensors.

MSPs often want to retain the right to increase rates for new subscribers with whom the MSP is unfamiliar.  Flexible rates allow MSPs to ensure new subscribers understand the importance of keeping their account current.  A managed services agreement that does not allow the MSP to raise rates under certain conditions exposes the MSP to potential losses.

If you are selling an MSP, buying an MSP, or if you are an MSP enrolling new subscribers, you should consult counsel experienced in advising managed service providers.

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IBM has begun a comprehensive program of compliance audits of its software clients. Scott & Scott’s clients have begun receiving letters from IBM Software Compliance demanding cooperation with a “routine assessment” of the client’s deployment of IBM software. According to the letter, IBM employs the services of Deloitte, LLP to conduct these audits and states that it is performing the audits to:

“confirm licensing requirements, determine actual deployment and usage, verify compliance with IBM applicable agreements and enhance IBM’s understandings of the challenges…in managing their IBM software deployments.”

According to IBM, these audits are part of a broad initiative to audit all of its clients. This is one of the most audacious compliance moves we have seen in the software industry. While most major publishers have compliance programs, we are not aware of any software company who plans to audit all of its customers. Here, however, IBM appears to be invoking its right to “conduct a routine assessment” under licensing provisions without prior suspicion of software licensing noncompliance.

These audits can entail significant financial exposure, and the software products at issue often form the lynch pins of whole lines of business. A company targeted by an audit of this type should seek experienced counsel to identify and defend its rights under the software license agreements. There may be significant rights pertaining to the audit contained within licensing agreements that could strengthen the target company’s position throughout the audit process.

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On July 13, 2010, online auction giant eBay, Inc. was sued for $3.8 billion in the United States District Court for the District of Delaware by XPRT Ventures, LLC, on claims that eBay incorporated XPRT’s patented business method processes in eBay’s payment processing technology and that eBay breached a confidentiality agreement that allegedly covered the processes in question.

The viability of XPRT’s claims will depend on a number of factors that likely will be points of contention during the litigation. Those factors include the patentability of the processes in question (especially in light of the Supreme Court’s recent Bilski opinion regarding business method patentability), the degree to which the processes incorporated into eBay’s payment methods really are encompassed, if at all, within XPRT’s patent claims, and the enforceability of the confidentiality agreement referenced in (though not attached to) XPRT’s complaint, among others.

Patent infringement claims – especially those involving patented business methods and processes – are fairly common, and especially so when a defendant, such as eBay, has deep pockets and a similarly deep dependence on technological innovation in order to remain competitive. XPRT’s claims are somewhat more incendiary than those involved in many such suits, in that they include allegations of intentional wrongdoing by eBay’s officers and attorneys. However, the case generally appears to fit within a fairly common paradigm of a relatively unknown patent holder making claims for significant monetary damages based on patented technology allegedly incorporated in some aspect of the defendant’s products or services. Microsoft’s litigation with i4i, Inc. regarding XML-related technology in its Word software is another noteworthy, recent example.

The XPRT lawsuit also has the potential to be more of a news item than the average patent-infringement suit, because it alleges that the wrongdoing in question occurred during a period of time in which California gubernatorial candidate Meg Whitman was the CEO of eBay. Recent history shows that California politics – especially those involving contests for the Governor’s Office – almost always entail explosive political drama, so it would not be surprising if the lawsuit is used as a political weapon against Ms. Whitman in the run-up to the election. However, Ms. Whitman is not named separately as a defendant in the lawsuit, and there are no allegations in the complaint that she was directly responsible for any of the allegedly wrongful conduct.

Technology-dependent firms of all types must be prepared to recognize patent exposure as a cost of doing business, and they must be ready to work closely with knowledgeable counsel to evaluate the integrity of any patents they hold as well as the validity of any patent claims with which they are presented.

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Not long ago a small software company offered a big cash reward to anyone who read the End User License Agreement (or EULA) for their software product. The catch: you have to read the EULA to even know about the offer.

PC Pitstop buried a clause in their EULA that offered the reward to anyone who sent a message to the enclosed email address. The point was to prove that people rarely, if ever, read their software licenses. They were right – four months and 3,000 downloads later, one sharp-eyed end user finally wrote in and claimed the $1,000 prize. See http://www.pcpitstop.com/spycheck/eula.asp

Software developers are well aware of the fact that the end users who buy their products rarely read their license agreements. Many people are surprised to discover that the EULAs for their software might contain provisions granting the software company the right to conduct an onsite software audit with no notice, waive important consumer rights or other draconian measures which they would never knowingly agree to.

But this trend is changing as more IT professionals discover the importance of understanding their EULAs. Before Windows VISTA was released, Microsoft made the EULA publicly available. Not long after the IT community was in an uproar over some of the proposed provisions, including one that only allowed the end user to transfer the installation to a new system once (upgrading your existing system could constitute such a transfer as well). After that, you’re done. Want to transfer that software twice, or make a couple of upgrades? Go buy another copy of Windows then. That was essentially what the new license stated.

So what happened when the IT community raised their concerns? Not long afterwards, Microsoft removed the EULA and replaced it with a new, more user friendly version. See http://www.securityfocus.com/columnists/420.

This is an important development; as IT professionals and attorneys continue to scrutinize these agreements, software developers will increasingly bring their licenses in line with consumer expectations. These examples prove that it can (literally) pay to read those license agreements.

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On the highest level, open source is the principle to allow free access to the intellectual property of the design of products to promote creativity.  The term is now most often associated with software.  Open source software is source code that is made available to the general public with relaxed or no intellectual property restraints that would keep another person from customizing the source code for their particular use or from building on the original source code to make use of the software for their particular use.

In early 1998, the industry leaders of the open source movement met at an event that would later become known as the “Open Source Summit.”  This meeting led to the organization of the Open Source Initiative, a non-profit corporation formed to advocate the benefits of open source software.  According to the Open Source Initiative, whether software can be considered open source really depends on the distribution terms of the open source software. 

To meet the standards of the Open Source Initiative, the distribution terms of open source software must meet the following criteria:

1.  The open source software license cannot restrict any party from selling or giving away the software as a component of another software program containing programs from several different sources and the license cannot require any fee for sale.

2.  The open source software must include source code and must allow distribution of the source code.

3.  The open source software license must allow modifications and derivative works, and, importantly, must allow the modifications and derivative works to be distributed under the same terms as the license of the original software.

4.  The open source software license may restrict source code from being distributed in modified form only if the license allows distribution of patch files with the source code for the purpose of modifying the program at build time.  The license must permit distribution of software built from modified source code.

5.  The open source software license cannot limit use to any person or group of people.

6.  The open source software license cannot limit use in any field, such as for commercial purposes.

7.  The rights attached to the open source software must apply to all whom the program is redistributed without the need for execution of an additional license.

8.  The open source software license cannot be specific to a product.

9.  The open source software license cannot place restrictions on other software that is distributed with the open source software.

10.  The open source software license cannot demand that a specific technology be used with the software.

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In order to win under Anti-Cybersquatting statute, a plaintiff must prove the defendant (a) had a “bad faith intent to profit from the mark,” and (b) registered or uses a domain name that is “identical or confusingly similar” to the mark in question.  15 U.S.C. § 1125(d)(1)(A)(i)-(ii).  Much of this turns on whether the defendant operates in the same goods as the plaintiff. 

For example, in Bally Total Fitness Holding Corp. v. Faber, 29 F. Supp. 2d 1161 (C.D. Cal. 1998), the defendant operated a website under the name “ballysucks.com,” a website dedicated to complaints about the plaintiff’s Bally’s health-club business.  The court found that even though the plaintiff and the defendant both hosted websites on the internet using the term “BALLY” in the domain name, the parties did not operate in “related goods.”  Id. at 1163.  The court concluded “[n]o reasonable consumer comparing Bally’s official web site with [the defendant]’s site would assume [the defendant]’s site to come from the same source, or thought to be affiliated with, connected with, or sponsored by the trademark owner.”  Id. at 1163-65. 

 When faced with a claim under the Anti-Cybersquatting statute it is very important to evaluate an argument that the defendant does not operate related goods. 

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 To show that a mark is used in commerce, a plaintiff must prove that the mark “is used or displayed in the sale or advertising of services and the service are rendered in commerce.”  15 U.S.C. § 1127(2).  The issue in internet marketing cases is whether using a mark to generate search-result links and sponsored links is considered use “in commerce.”  If you are faced with a trademark infringement claim related to internet marketing it is important to evaluate  this defense.   

In Merck & Co. v. Mediplan Health Consulting, Inc., 425 F. Supp. 2d 402, 415 (S.D.N.Y. 2006), the defendant used the plaintiff’s mark, “ZOCOR” as a search-engine keyword to generate sponsored links.  The court found that as a matter of law, this type of use was not use in commerce, but rather “an internal use of the mark.”  Based on the plaintiff’s failure to show use of the mark in commerce, the court dismissed the plaintiff’s trademark claim and declared that use of “a key word to trigger the display of sponsored links is not use of the mark in a trademark sense.”  Id. 

 A successful defense based upon no use in commerce can result in an early disposition of a case because unlike many trademark infringement defenses this is a legal issue decided by the court on a pre-trial motion to dismiss or for summary judgment.  

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 It is no surprise that the open source software community has been shaken by the litigation begun by SCO.  To begin with, Caldera Systems, the corporate entity now doing business as SCO, originated as an open source company whose only product was based on Linux.  Therefore, the open source software community feels betrayed by a company whose interests it once shared and supported. 

If SCO wins it fundamental claim that it owns the underlying source code to UNIX, the open source software community will lose control over one of its most used programs.  To the open source software community, the loss comes not only in the UNIX source code but the many man-hours invested by subsequent developers in customizations and derivations built on the original UNIX source code.

Because the open source software community depends on the free exchange of intellectual property within the source code, a system that works only if each developer that contributes to the whole has sufficient access to the intellectual property, a win for SCO could threaten the very model of open source software.  The open source software model breaks when one developer contributes an infringing work, because as SCO has claimed, every user thereafter is infringing.

What does this mean for a company using or developing open source software?  First, a company must know that it may be liable for copyright infringement even without knowledge that a work was subject to copyright infringement.  Like any other software the company uses, the company must know where the software originated from.  However, unlike most software programs where the company has assurance from a license that the vendor owns the copyright in the source code and the company, through the license, is allowed to use the software, with open source software the SCO litigation means that a company must complete some due diligence regarding the chain of title of the source code of the open source software to ensure that there are no other intellectual property claims to the source code.  

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2007 was an exciting and dynamic year for the software asset management industry.
As we enter a new year, the software industry will continue to evolve. Here are my predictions for what will happen in 2008.

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Like all audits, success in a SIIA software audit depends less on what you own and more on what you can prove that you own. Although not required by law, the SIIA takes the position that a target company is out of compliance for each installation of SIIA member software products for which the target company cannot produce a dated proof of purchase. Many clients are dismayed to discover what does and does not constitute valid proof of purchase according to the SIIA.

Not Considered Valid Proof
1. Copies of Checks to Software Vendors
2. Dated Purchase Orders
3. Undated Software Licenses
4. Credit Card Statements Evidencing Software Purchases
5. Certificates of Authenticity
6. Media, Manuals, or Key-Codes
7. Invoices Bearing and Entity Name Other than the Entity Named in the SIIA’s Initial Letter

Valid Proof of Purchase
1. Dated Invoices in the Name of the Audited Entity
2. Soft Records (online account statements) from Recognized Resellers
3. Signed and Dated License Agreements
4. Soft Records from SIIA Member’s such as Microsoft Licensing Statements
5. Cash Register Receipts for Retail Sales where Product, Version, Quantity and Price Paid are Included.

Understanding how the SIIA analyzes software audit materials is critically important to achieving the most favorable outcome. In our experience, it is the most time consuming and difficult part of the process for clients to handle on their own.

Scott & Scott, LLP is not affiliated in any way with the SIIA.

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 One of the most controversial tactics the software policing agencies use when calculating its settlement demands is its practice of unbundling software suites such as Microsoft Office and Adobe Creative Suite. Unbundling occurs when the target of an agency audit is unable to provide acceptable proof of purchase for one or more installation of a software suite.

The effect of unbundling is to dramatically and artificially inflate the monetary component of an agency settlement because the fines are based upon the MSRP of each component part of the software. In an agency software audit involving Microsoft Office for example, they unbundle the suite by separating Microsoft Outlook, Microsoft Word, Microsoft Excel, Microsoft PowerPoint, and Microsoft Access and then calculate its proposed fine on the basis of the MSRP of each component. This practice results in a proposed fine per installation of approximately $2,000 for a product with a market price ranging from $150 to $350, depending on the version.

In my opinion, the practice of undbundling is completely contrary to law because the software suites of an agency's member publishers are compilations under the copyright law and therefore constitute a single work for purposes of calculating statutory damages for infringement. The U.S. Copyright Act 17 U.S.C. § 101(c) defines a compilation as follows:

A "compilation" is a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship. The term "compilation" includes collective works.”

The statutory damages provision of the U.S. Copyright Act 17 U.S.C. § 504(c) provides in pertinent part that:

For the purposes of this subsection, all the parts of a compilation or derivative work constitute one work.

Federal court’s have also interpreted these provisions to preclude recovery of statutory damages for the component parts of a compilation. For example, in XOOM v. Imageline, the Court of Appeals for the Fourth Circuit only made one statutory damage award for each compilation of electronic clip art, even though each compilation included thousands of works because “[a]lthough parts of a compilation or derivative work may be ‘regarded as independent works for other purposes[,]’ for purposes of statutory damages, they constitute one work.” XOOM v. Imageline at 285, citing H.R. Rep. No. 94-1476, at 162 (1976).

Similarly, in WB Music Corp. v. RTV Communications Group, 445 F.3d 538 (2d Cir. 2006) the Court of Appeals for the Second Circuit interpreted 17 U.S.C. § 504(c) and discussed the distinction between compilations authorized by the copyright holder that constitute “one work” for statutory damages purposes and collections of separate works compiled by the defendant and never authorized by the copyright holder. Because the software suites implicated in SIIA audits involve separately copyrighted works included in a compilation authorized by the copyright owners, section 504(c) applies and prohibits the award of statutory damages for the component parts of the suite.

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One of the most common mistakes I encounter in software audits is what I call the post-effective date software buying spree. The buying spree occurs in response to a letter from a publisher or publisher's attorneys requesting a self audit. Many clients are discouraged to learn that software purchases made after the date of the initial letter have no impact in a software audit matter. For this reason, I advise my clients against scrambling to acquire software in response to a software audit.

The first thing a target of a software audit needs to do is preserve the evidence of software products installed on the company’s computers as of the audit effective date. Second, the software installed needs to be reconciled against proof of purchase information to determine whether there is gap between licenses owned and software installed. Third, a decision needs to be made regarding whether to purchase or uninstall any unlicensed software. The auditing entity is only concerned with those products installed as of the audit effective date, and accepts only proofs of purchase dated on or before that date.

I advise my clients that regardless of what was installed on the audit effective date, they only need to purchase software licenses for products that they need to use going forward. Although it will not resolve past liability, companies may choose to uninstall unlicensed products at the conclusion of the audit matter, rather than purchase unnecessary software simply because it was installed on the effective date. At the conclusion of a software audit matter, the target must certify that it has come into compliance through the combination of buying and\or uninstalling the products in question.

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One of the most common mistakes I encounter in BSA audits is what I call the post-effective date software buying spree. The buying spree occurs in response to a letter from the BSA’s attorney’s requesting a self audit. Many clients are discouraged to learn that software purchases made after the date of the BSA’s initial letter have no impact in a BSA audit matter. For this reason, I advise my clients against scrambling to acquire software in response to a BSA audit.

The first thing a target of BSA audit needs to do is preserve the evidence of BSA member software products installed on the company’s computers as of the audit effective date. Second, the software installed needs to be reconciled against proofs of purchase information to determine whether there is gap between licenses owned and software installed. Third, a decision needs to be made regarding whether to purchase or uninstall any unlicensed software. The BSA audits only those products installed as of the audit effective date, and accepts only proofs of purchase dated on or before that date.

I advise my clients that regardless of what was installed on the audit effective date, they only need to purchase software licenses for products that they need to use going forward. Although it will not resolve past liability, companies may choose to uninstall unlicensed BSA member products at the conclusion of the audit matter, rather than purchase unnecessary software simply because it was installed on the effective date. At the conclusion of a BSA matter, the target must certify that it has come into compliance through the combination of buying and\or uninstalling.

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One of the most controversial tactics the BSA uses when calculating its settlement demands is its practice of unbundling software suites such as Microsoft Office and Adobe Creative Suite. Unbundling occurs when the target of a BSA audit is unable to provide acceptable proof of purchase for one or more installation of a software suite.

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One of the top ten questions asked by my clients is “How long does the BSA self-audit process take from start to finish?” Of course I give the standard lawyer answer: it depends. Here are the steps to a typical BSA audit.

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The targets of BSA audits frequently believe that they know who reported them to the Business Software Alliance. Justifiably angry, they want to know what legal recourse they have against the informant. Because the informants are frequently out of work, having been fired by the target, I advise my clients about the number one rule governing litigation: never sue poor people. Legally speaking, the most probable cause of action against an informant in a BSA audit would be based upon a breach of an employment agreement containing a confidentiality provision. We have frequently assisted clients in drafting letters to former employees presumed to be the informant, forcefully reminding them of their confidentiality obligations, but have come short of advising clients to file suit against a presumed informant. 

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The Business Software Alliance is aggressively targeting businesses accusing them of software piracy. Businesses around the world are facing off with the BSA as the media continues to raise questions about its questionable enforcement tactics such as offering up to one million dollars in reward money. This ABC News report contains the Business Software Alliances’ Blow the Whistle campaign as well as interviews with BSA officials and me. If you have been targeted in an investigation by the Business Software Alliance, you should seek the advice of an experienced attorney.

Click the link below to listen to the Full Report on Business Software Alliance by ABC News:

 Business Software Alliance Report

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When I heard a Microsoft executive recently explain its new approach to software license compliance enforcement, I couldn’t believe my ears. Statements like, “Microsoft does not endorse audits,” and “Microsoft believes that most of its customers want to be in compliance, they just need help with tool deployment and reconciliation,” sounded to good to be true. In reality and not surprisingly, the program was not playing out as presented.

The Harsh Reality

Very quickly after Microsoft’s Software Audit practice was disbanded and its SAM Engagement program implemented, clients began calling with questions and concerns about Microsoft’s proposal and approach. For example, while Microsoft officially touts its SAM Engagement service as being completely voluntary, clients are given the impression to the contrary by veiled threats that the “matter will be escalated to legal” if they begin asking too many questions.

Microsoft Official Position

Microsoft’s official position on its SAM initiatives is extremely positive. Microsoft has certified a group of partners to assist companies with Microsoft license reconciliation and to assist customers with implementing software asset management best practices within their organizations. In theory, Microsoft has it right. Helping share the burden of the “compliance tax” imposed by its products is smart business. And because most companies are honest, Microsoft will yield the revenue from audit activity that currently is consumed by the BSA and the SIIA when they conduct more adversarial audits on Microsoft’s behalf.
Why Is Microsoft Paying Its Partners?
Interestingly, Microsoft even pays its certified partner to deploy an automated discovery tool, conduct the license reconciliation and share the information with Microsoft and the customer. Unfortunately, in practice the SAM engagement is just an audit by another name. Unless properly managed these audits can be expensive and disruptive to your business.

How You Get Targeted?

Evidently, Microsoft is reviewing previous and current purchase activity to develop a profile of its customers most likely to have a compliance gap. Thereafter, Microsoft and its partners approach the target to propose assisting them with dealing with any compliance problems they have. Microsoft appears to be focusing it efforts on mid-market enterprises with 500 to 2000 computers.

The Partner’s Conflict of Interest Problem

Unfortunately for businesses, the SAM partner is operating under a conflict of interest, and will naturally want Microsoft to yield more revenue from the end customer than for which it has been paid by Microsoft. Further, the SAM partner is obligated to turn over the results of its findings to Microsoft, creating an additional conflict of interest. Regardless of how it is presented, Microsoft is paying its partners to audit customers so they can extract incremental revenue related to licensing gaps that are present with virtual certainty in the average company.

Get an NDA With the Partner

Before agreeing to proceed with the SAM engagement, I advise clients to require the SAM partner to enter into a Non-Disclosure and Confidentiality Agreement precluding the company from sharing any of the information it discovers during engagement with any third party, including Microsoft. If the partner is to act as the target company’s consultant, they should be expected to sign an industry standard NDA.
Get an NDA and Settlement Discussions Only Agreement from Microsoft
After you present the partner with an appropriate NDA, the Partner will disclose that its contract with Microsoft requires it to share the information it gathers during the engagement and the next question that will certainly arise is, ‘how will Microsoft be informed regarding your purchase needs?’ The answer is you will agree to share the information directly with Microsoft provided that Microsoft signs an NDA with appropriate language that protects the information shared during potential settlement negotiations. By requiring these two agreements, you place the engagement on a footing consistent with the way Microsoft is marketing the program. Unless both parties agree to these agreements, I advise clients to decline the SAM engagement.

Cooperate Without Placing Your Company in Jeopardy

A properly managed SAM engagement can be extremely valuable and can reduce the drain on internal resources that may be less experienced than the SAM partners at conducting project-based license compliance reviews. The key is to restructure the relationships between your business, Microsoft and its SAM Partner to avoid the conflicts of interest, preserve confidentiality, and insure that you are able to negotiate with Microsoft from a position of strength.

Negotiate From A Position of Strength

In addition to protecting your business with the appropriate contracts going into the engagement, it is important that you engage an attorney with expertise on Microsoft licensing to review the Partner’s work-product before it shared with Microsoft and to protect your legal interests. Microsoft licensing is subject to interpretation and is frequently ambiguous regarding how the rules pertain to a particular situation. For this reason, it is critical that the Partners’ license reconciliation, which will be the starting point for negotiations, is thoroughly reviewed and analyzed by experienced counsel. Only by understanding the issues pertaining to all alleged deficiencies will you be able to negotiate from a position of strength.

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Targeted by the BSA? Almost all of my clients wonder how the Business Software Alliance got their name. Have you heard the BSA’s radio campaign offering rewards of up $1,000,000 dollars to disgruntled employees? The BSA entices disgruntled employees to rat on their employers in exchange for the promise of reward money. If you have been contacted by the BSA, a former or current disgruntled employee likely heard the Business Software Alliance’s Blow the Whistle campaign on the radio.

Click the link below to listen to the Business Software Alliance’s Radio Campaign as reported by ABC News:
Business Software Alliance Report

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Minimum Advertised Pricing (MAP) policies prohibit resellers or dealers from advertising a manufacturer’s products below a certain minimum price. The primary purpose for implementing a MAP program is to promote fair competition across the manufacturer’s affiliate and dealer channels. MAP programs are critically important to manufacturers who sell their products on the internet in light of the extremely low costs of advertising in pay-per click, shopping comparison, and auction sites. Despite the value of MAP programs, significant legal concerns exist regarding establishment and enforcement of minimum advertised pricing policies for e-commerce companies.

Under U.S. Antitrust law, vertical price fixing agreements between manufacturers and their dealers are illegal. Accordingly, when implementing a MAP policy, it is critical to establish a policy that controls the price at which products can be advertised but not the ultimate price at which the products may be sold. The law is well settled that manufacturers may set suggested retail prices and that minimum advertised pricing policies are not per se illegal but will be analyzed by the courts under a rule of reason that considers all of the relevant circumstances. When developing a MAP program for e-commerce, I generally advise my clients to:

1. Act Unilaterally – Section 1 of the Sherman Act only applies to concerted action but does not apply to the unilateral establishment of a minimum advertised price by a manufacturer.

2. Regulate Advertisements Not Prices – the law is clear that agreements between manufacturers and dealers that fix the price at which products are to be sold are per se illegal. MAP policies should focus on advertised prices in paid search ads, shopping comparison ads, and internet landing pages but not in shopping carts or other point of sale interfaces.

3. Avoid involving dealers in policing activity.

4. Avoid coercive action regarding actual prices sold.

5. Treat all dealers equally and unilaterally terminate those that don’t comply.

The law involving minimum advertised pricing for e-commerce is in flux. Before adopting a policy, you should consult with an attorney experienced in antitrust and e-commerce law.

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Software Piracy is a politically charged term coined by the software industry to vilify its customers who are struggling to manage compliance with complex and ambiguous licensing rules. Even though the term software piracy suggests intent or knowledge, according to the software industry, piracy includes unintentional overuse of software licenses by end-user businesses. This definition of piracy promulgated by the software industry misplaced and is often used to justify otherwise questionable conduct such as paying disgruntled employees reward money to for reporting that their former employers are guilty of software piracy. Scott & Scott, LLP proudly defends companies accused of software piracy by software publishers and their trade groups such as the BSA and SIIA. If you have been accused of software piracy, please call Scott & Scott, LLP for a consultation.

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Software piracy audits conducted by the BSA and the SIIA threaten small and medium sized businesses. As the economy tightens, software publishers such as Microsoft, Adobe, and Autodesk hide behind software piracy enforcement groups to pursue customers accused of installing more software on corporate computers than they have purchased licenses for. If your company has been accused of software piracy, here’s what you should do:

• Hire an Attorney – BSA and SIIA have experienced software piracy attorneys working for them, you should too.
• Preserve Evidence – do not uninstall or change computer configurations until an accurate inventory of in-scope computers has been gathered.
• Avoid Knee-Jerk Purchases – a natural but counterproductive response to a software piracy audit is to run out and purchase software. I advise my clients to avoid making purchases until a complete inventory and case assessment has been completed.
• Maintain Confidentiality – client prepared audit materials and related documentation may be discoverable in a lawsuit. We conduct attorney-supervised audit reports protected by attorney-client and attorney work-product privileges.
• Condition Audit Disclosure – software piracy audit materials should only be disclosed after an appropriate agreement regarding confidentiality and non-use of the information has been signed by the software piracy enforcement agency.
• Estimate Software Piracy Fines – always review the draft audit materials with your attorney before they are produced to make sure everyone is clear on the potential financial exposure involved. Our software piracy fine calculators are available at: BSA Fine Calculator and SIIA Fine Calculator
• Argue Software Piracy Legal Issues – there are many legal issues involved in software piracy audits including what constitutes infringement, who has the burden of proof, how damages should be calculated, what constitutes proof of ownership and many others. We vigorously argue these legal points in an effort to reduce software piracy settlement demands.
• Negotiate Non-Monetary Terms – software piracy audit settlement agreements are incredibly one-sided and unfair to the targets. I advise my clients to carefully consider important issues like future audit obligations, confidentiality of the settlement terms, the nature and scope of the release being offered.
• Focus on Your Business – the only way to be successful in a software piracy audit is to continue to stay focused on running your business and taking care of your clients.

If you have been accused of software piracy please call Scott & Scott, LLP for a free consultation.

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