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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 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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Open-Source software can provide businesses with an opportunity to acquire software for little or no monetary cost.  However, businesses should carefully examine the license agreements accompanying the open-source software they incorporate into their business products.

 For example, many open-source license agreements require licensees of the software to make the source code of the licensee’s software product available if the licensee includes the open-source software in the licensee’s software.  In other words, if a business includes open-source software in the software it produces and sells, the business may also be required to make its own proprietary software code available to the public.  This can have significant effects on the business’ intellectual property interests.  A business wishing to keep private the source code of its commercially-available software should not select open-source software solutions.

 Similarly, any changes a business makes to open-source code must generally be made available as open-source code.  Changes to the original open-source code may need to be tracked and documented in a file accompanying the code that includes dates the changes were made.  Open-source code license agreements also often include certain notice requirements intended to identify to the user the original distributor of the code, the contributor to the code, and the type of license covering the code.  The actual open-source license may need to be distributed with the code, perhaps in the code itself.  The GNU General Public License defines the use terms of most open-source software.  Most distributors of open-source software use either the GNU GPL or a license based on the GNU GPL.

 Open-source software, though powerful and low-cost, may come with hidden costs and may place your business at risk of losing protection of its intellectual property.  Businesses should consult with counsel experienced in evaluating open-source license agreements before implementing an open-source solution.

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In Asset Marketing Systems, Inc. v. Gagnon, 542 F.3d 748 (9th Cir. 2008), the Ninth Circuit recently clarified the law of implied licensing.  Kevin Gagnon began his relationship with AMS as an independent contractor creating software programs for AMS, a field marketing organization offering sales and marketing support to insurance marketing entities.  The Ninth Circuit found that Gagnon granted an unlimited and non-exclusive license to AMS to retain, use, and modify the computer software and that because AMS paid Gagnon, the license was irrevocable.

Gagnon and AMS memorialized their relationship by executing a one-year Technical Services Agreement (“TSA”) that included no provisions regarding licensing of intellectual property developed by Gagnon for AMS.  The relationship continued several years after expiration of the TSA.  Gagnon later proposed that AMS execute an Outside Vendor Agreement (“OVA”) that included a provision granting to Gagnon and his company, Mister Computer, all intellectual property rights to the software Gagnon developed for AMS.  After AMS rejected the OVA and counter-proposed with a revised agreement granting it all rights and license to the software, AMS decided to terminate its services with Gagnon.  Over the course of the following several months, Gagnon and AMS exchanged correspondence evidencing that confusion existed as to who owned the rights to the software and that the parties’ understanding regarding payment for services differed.

AMS filed a complaint in California Superior Court against Gagnon alleging, among other things, misappropriation of trade secrets and conversion.  Gagnon removed the case to federal court and counterclaimed alleging copyright infringement and other intellectual property and contractual claims.  The district court remanded AMS's claims back to state court.  AMS then filed its remanded state law claims as counter-counterclaims to Gagnon's federal counter-claims.

The Ninth Circuit determined that although exclusive licenses must be in writing, grants of nonexclusive licenses need not be in writing, and may be granted orally or by implication.  The court relied on a case involving use of movie footage and determined that an implied license is granted when (1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and (3) the licensor intends that the licensee-requestor copy and distribute his work. 

The court concluded that the first two prongs of the test were satisfied because AMS requested the programs and Gagnon delivered the programs to AMS.  Gagnon, however, disputed that he had the intent required by the third prong of the test.  The court noted that Gagnon misunderstood the import of the intent requirement.  The relevant intent is the licensor's objective intent at the time of the creation and delivery of the software as manifested by the parties' conduct.  The court relying on precdent from another court, applied the following factors for determining whether the relevant intent exists:

• whether the parties were engaged in a short-term discrete transaction as opposed to an ongoing relationship;
• whether the creator utilized written contracts providing that copyrighted materials could only be used with the creator's future involvement or express permission; and
• whether the creator's conduct during the creation or delivery of the copyrighted material indicated that use of the material without the creator's involvement or consent was permissible.

The court reviewed the course of conduct of the parties, including the written agreements whether executed or unexecuted, and concluded that Gagnon demonstrated the objective intent that the licensee-requestor copy and distribute his work.  Any of Gagnon’s conduct contrary to that conclusion was belated and insufficient to sway the court.  Of interest is Gagnon’s argument that the splash screens he created reserving in Gagnon a copyright in the software negated AMS’s license to use the product.  The court determined that the splash screens speak to Gagnon's intent to retain copyright ownership over the programs, not to his intent to grant or not grant a license as would be his right as the copyright owner.  Also of no concern to the court was Gagnon’s registration with the United States Copyright Office for his six programs one week prior to his termination from AMS.

Finally, because the AMS paid consideration, the license is irrevocable.  The Ninth Circuit affirmed the district court’s granting of summary judgment against Gagnon and ruled that Gagnon gave an implied license to AMS to use and modify the computer software he created after the termination of their relationship.

If your company develops software for other businesses or licenses software developed specially for your company, you should seek counsel experienced in protecting your intellectual property rights.

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A lawsuit filed in the U.S. District Court for the Southern District of New York by the Free Software Foundation (FSF) against Cisco Systems has the potential to generate important legal guidance regarding the enforceability of open source software licenses.

Among its many other business activities, Cisco distributes network routers and other consumer products under the Linksys brand. Several of those products incorporate as firmware certain open-source software products in which the FSF holds the copyrights. The FSF licensed that software under the GNU General Public License (GPL), which requires downstream distributors to include a copy of the source code with the original or modified versions of the software they make available to others. According to the FSF, Cisco failed in several instances to include the source code as required under the GPL. The FSF claims that it attempted to work with Cisco since 2003 to implement appropriate compliance protocols for the GPL-licensed products Cisco distributed, but that those efforts had reached an impasse, making litigation necessary.

Other litigants have enjoyed some success in disputes involving allegations of improper distribution of GPL-licensed products, notably including several out-of-court settlements obtained by the developers of BusyBox software. (See Robert J. Scott and Christopher Barnett, Hot Topics in Open Source Software Licensing, available here.) The BusyBox plaintiffs were represented by the Software Freedom Law Center, which is representing the FSF against Cisco.

However, the FSF-Cisco suit may present an interesting opportunity for the courts to provide legal guidance regarding the enforceability of the GPL and whether the failure to distribute source code constitutes copyright infringement or, rather, merely the violation of an independent provision of the license agreement. It is possible that implementation of FSF-sanctioned compliance procedures may present prohibitive costs for Cisco, giving it the incentive to pursue a vigorous defense against the FSF’s claims and making more likely the possibility of a federal court decision regarding the strength of the GPL. However, each side in the dispute would have much to lose by an adverse decision, and aversion to that risk would tend to lead the parties to settle, if possible.

Developments in this case will be very interesting to monitor. Businesses with an interest in the use or distribution of open-source software may finally receive much-needed legal guidance regarding the terms and conditions under which such programs may be incorporated into new products and business models.

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Microsoft Antigen Becomes Microsoft Forefront

Microsoft’s server-level security product formerly known as Microsoft Antigen has been rebranded as Microsoft Forefront. According to Microsoft, Antigen products help businesses protect their e-mail and collaboration environments against viruses, worms, spam, and inappropriate content. Microsoft indicated that the next versions of the Microsoft Antigen products will all be rebranded under the Forefront name.

Business customers who purchased Antigen Software Assurance may be wondering if they are entitled to use Forefront. As long as the Software Assurance is still active and up to date, an owner of Antigen Software Assurance is entitled to receive and use Forefront updates.

Complying with Microsoft Server CAL and Terminal Server CAL Licensing Rules

Microsoft Windows Terminal Server is a technology allowing users to access a Windows Server and create a “session” that provides the user with access to applications and data on a remote computer over a network. A session is a graphical user interface hosted on a Server that is accessible from the user's computer. Microsoft requires its customers to purchase a Terminal Server Client Access License (TS CAL) for each user connecting to the server and creating a session. However, the TS CAL is different from a Windows Server CAL. The Server CAL allows users to access the server and perform functions related to managing files, browsing folders, and printing documents located on the Server. Accessing a server with a Server CAL to browse folders does not create a session. Rather, it opens up a folder on the server similarly to a folder located on the user's computer.

Though Terminal Services functionality is included with a Windows Server license, each user or device that creates a session on a Windows server and engages the Terminal Services of the Server must have a TS CAL. Purchase of a Server CAL does not include Terminal Services access rights. However, ownership of a Server CAL is required for each user or device with a TS CAL.

If you find navigation of the complex Microsoft Server licensing rules daunting, you should consult counsel experienced in interpreting Microsoft's licensing terms.

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Software developers intending to license their products at a profit eventually must address the question of how they intend to price their licenses. The answer to the question typically depends on being able to balance a number of profit-oriented and customer-oriented factors. For example, the simplest licensing model for many customers to understand is the single-seat license typically associated with business applications like Microsoft Office and Adobe Acrobat. However, despite its conceptual simplicity, such a model can be particularly inappropriate for a variety of software products such as middleware or server-based products in a distributed environment. In these circumstances, the developer’s financial interests require a more creative approach to the question.

Per-user licenses may make sense for hosted applications or those where the primary product is a server-installed application with multiple users on workstation clients. Such a model allows for more straightforward license counting and billing, but it still may be too simplistic for certain products, such as middleware, where computing resource usage may be a more relevant metric than the number of users with access. In these cases, processor licensing may be a more appropriate alternative, though such a model typically entails a much more complicated accounting process, especially in environments with many virtual machines.

Developers who deliver highly customized products for their customers with whom they have long-term relationships may prefer a maintenance-subscription model, where developer and customer reach an agreement regarding an essentially flat fee to license, maintain and/or support the software for a given term. Such a model can help to give both sides to the transaction peace-of-mind that the amounts being charged for software are reasonable. However, such agreements typically require much more negotiating work at the front end as well as a willingness by the parties to work together on a regular, ongoing basis.

Finally, developers catering to a particular industry may be able to price their licenses according to some industry-specific metric, such as sales closed or securities traded. This can help to ensure a fair price to the licensor while still tying itself to actual use for the customer’s accounting purposes. The model clearly would be less likely to work, though, if the developer intends to license his product to customers in a range of industries.

Where questions arise regarding the most appropriate licensing model to follow, or where ongoing negotiations suggest the desirability of an outside opinion, it is advisable to seek the assistance of counsel with experience in software licensing transactions.

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If you are a software developer who is preparing to sell or otherwise distribute software, there are a number of protective measures you should take while you develop the software and before you distribute it.

While developing the software, you should consider executing a Non Disclosure Agreement with any developers you retained to assist with creation of the software. A Non Disclosure Agreement will prohibit the developers from disclosing to any third parties information related to the project, including the code itself. A Non-Competition/Non-Solicitation Agreement similarly will prohibit your developers from leaving your project and joining a competing software development company or team for a predetermined amount of time and within a restricted geographical area. However, such agreements typically are reviewed carefully by courts and in some cases may be illegal, so it would be critical to consult with counsel before placing too much reliance on them.

Once the project nears completion, you should begin preparing a copyright application and software license agreement. A copyright on the software code, user documentation, and screenshots of the software will protect your software from being misappropriated.  A federal copyright registration will enable you to bring a copyright infringement action in federal court against third parties improperly using your software or user documentation. Because copyright applications typically take 6-18 months to process, you should submit an application containing a version of the code that substantially resembles the final version of the code six months or more before you anticipate completion of the software. When you complete the code, you can distribute the software confident that you have a copyright in place and you can submit a revised copyright application containing a copy of the code in its final form.

Finally, a software license agreement should be attached to each copy of your code that is sold or distributed.  The software license agreement (also called an end user license agreement) identifies the permissions and prohibitions related to using your software.  For example, the software license agreement may provide that the end user may only install one copy of the software for use by one person. Additionally, software license agreements often contain important provisions limiting your liability related to installation and use of the software.

If you are preparing software for distribution, you should consult attorneys experienced in assisting software developers and protecting their intellectual property.

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For years, many businesses interested in renting computers running Microsoft software to third parties have faced a dilemma: either (1) commit to a complicated and potentially expensive Microsoft Services Provider License Agreement (SPLA), which until recently was the only license agreement under which Microsoft has allowed its software to be rented, (2) rent the computers outside a SPLA relationship and risk the exposure that such activity can entail in the form of an audit by Microsoft or by the Business Software Alliance (BSA), or (3) forego the revenue that might be realized from the rental business. Many other business owners have been unaware of the prohibition against renting in most Microsoft license agreements until discovering, in the context of a BSA audit, that the BSA typically treats a breached license as no license at all for the purpose of calculating the penalty to be paid to resolve a software audit. Worse, after paying that penalty to the BSA, affected businesses have been forced to enter into a SPLA in order to continue offering rental services, or else run the risk of losing the release from liability that they purchased with the settlement payment.

However, in a comparatively rare move toward licensing simplification, as of January 1, 2010, Microsoft is offering Rental Rights as an additive license for certain Windows operating system and Office productivity software licenses purchased under its Open and Select volume licensing programs. Now, instead of signing up for a SPLA, Microsoft’s compliance-minded volume licensing customers will be able to purchase rental rights along with other additive licenses (such as, for example, Software Assurance) when they purchase the underlying license for an eligible software product. The rental rights will be valid for the term of the underlying software license or for life of the system on which the software is installed.

More information on the new Rental Rights is available here:

https://partner.microsoft.com/40104043

The current pricing appears to be such that businesses with larger fleets of rental computers may want to stay with the more scalable SPLA licensing requirements. However, smaller businesses or those with a more limited number of rental systems should work with counsel or a licensing consultant to determine whether Rental Rights will be an appropriate mechanism to stay in compliance with licensing obligations.

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On July 22, 2010, software publisher AccuSoft sued Northrop Grumman Systems in federal court for breach of contract, copyright infringement and trademark infringement related to Northrop’s use of AccuSoft’s ImageGear and ImageTransport software. Northrop allegedly used and integrated AccuSoft’s products in the development of a paperless records information system it developed for the U.S. military. According to AccuSoft, Northrop failed, in particular, and in violation of applicable software license agreements, to provide the required periodic reporting regarding the number of end-user licenses for the AccuSoft products that Northrop had distributed. AccuSoft did not specify a damages claim in its complaint, though it did state that the unauthorized software distributions number in the “hundreds of thousands,” meaning that a decision in its favor potentially could entail a multi-million dollar penalty against Northrop.

Northrop has yet to answer or to respond to the lawsuit, so its position with regard to AccuSoft’s factual claims has yet to be determined. However, the facts presented in the complaint appear to reflect the kind of dispute that often arises when one or both parties to a software licensing relationship do not have an accurate grasp of controlling license agreements. Especially with many larger enterprises, the business units responsible for software license negotiation and acquisition may lack sufficiently open lines of communication with production departments, resulting in internal confusion regarding what agreements have been signed, what agreements remain in effect, and what those agreements mean for the company’s day-to-day operations.

Compounding the confusion is the fact that larger software license transactions often involve the execution of a master license or services agreement, to which other documents specifying discrete product or service orders are attached, as executed, as schedules or exhibits. Over time, the resulting “document soup” can become nearly impossible to manage unless the company’s has been diligent, in the interim, in tracking all material changes or amendments to the master agreement, all exhibits or schedules that have been executed since the beginning of the relationship, and the effects, if any, of those later instruments on earlier agreements.

Where businesses fail to take pro-active, enterprise-wide, contract-management steps at an early stage, disputes such as the Accusoft v. Northrop litigation become almost inevitable, especially in an age where many publishers, such as Microsoft, IBM and Oracle, to name a few, are proceeding with software audit initiatives, in some cases across their entire customer bases, in order to ensure compliant software use and licensing.

Businesses with a heavy reliance on software and technology licensing cannot afford not to work closely with counsel in reviewing the terms of all agreements that may affect their ability to use that software or technology in the way that their customers demand.

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