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Economic Consequences of Software Crime
In 1996 worldwide illegal copying of domestic and international software
cost $15.2 billion to the software industry, with a loss of $5.1 billion in
the North America alone. Some sources put the total up-to-date losses, due
to software crime, as high as $4.7 trillion. On the next page is a
regional breakdown of software piracy losses for 1994. Estimates show that
over 40 percent of North American software company revenues are generated
overseas, yet nearly 85 percent of the software industry’s piracy losses
occurred outside of North America. The Software Publishers Association
(SPA) indicated that approximately 35 percent of the business software in
the North America was obtained illegally. In fact, 30 percent of the
piracy occurs in corporate settings. In a corporate setting or business,
every computer must have its own set of original software and the
appropriate number of manuals. It is illegal for a corporation or
business to purchase a single set of original s!
oftware and then load that software onto more than one computer, or lend,
copy or distribute software for any reason without the prior written
consent of the software manufacturer. Many software managers are
concerned with the legal compliance, along with asset management and costs
to their organizations. Many firms involve their legal departments and
human resources in regards to software distribution and licensing.
Information can qualify to be property in two ways; patent law and
copyright laws which are creations of federal statutes, which are subject
to Constitutional authority. In order for the government to prosecute the
unauthorized copying of computerized information as theft, it must first
rely on other theories of information-as-property. Trade secret laws are
created by provincial law, and most jurisdictions have laws that
criminalize the violations of a trade-secret holder’s rights. The
definition of a trade secret varies somewhat from province to province, but
commonly have the same elements. For example, the information must be
secret, not of public knowledge or of general knowledge in the trade or
business. A court will allow a trade secret to be used by someone who
discovered or developed the trade secret independently if the holder takes
adequate precautions to protect the secret.
In 1964, the National Copyright Office began to register software as a form
of literary expression. The office based its decision on White-Smith
Music Co. v. Apollo, where the Supreme Court determined that a piano roll
used in a player piano did not infringe upon copyrighted music because the
roll was part of a mechanical device. Since a computer program is textual,
like a book, yet also mechanical, like the piano roll in White-Smith, the
Copyright Office granted copyright protection under the rule of doubt.
In 1974, the government created the Natural Commission on New Technological
Uses (CONTU) to investigate whether the evolving computer technology field
outpaced the existing copyright laws and also to determine the extent of
copyright protection for computer programs. CONTU concluded that while
copyright protection should extend beyond the literal source code of a
computer program, evolving case law should determine the extent of
protection. The commission also felt copyright was the best alternative
among existing intellectual property protective mechanisms. CONTU rejected
trade secret and patents as viable protective mechanisms. The CONTU report
resulted in the 1980 Computer Software Act, and the report acts as informal
legislative history to aid the courts in interpreting the Act.
In 1980, the Copyright Act was amended to explicitly include computer
programs. It now states that it is illegal to make or to distribute copies
of copyrighted material without authorization, except for the user’s right
to make a single backup copy for archival purposes. Any written material
(including computer programs) fixed in a tangible form (written somewhere –
i.e. printout) is considered copyrighted without any additional action on
the part of the author. Therefore, it is not necessary that a copy of the
software program be deposited with the National Copyright Office for the
program to be protected as copyrighted. With that in mind a copyright is a
property right only. In order to prevent anyone from selling your software
programs, you must ask a (federal) court to stop that person by an
injunction and to give you damages for the injury they have done to you by
selling the program.
The Software Rental Amendments Act was approved in 1990. This Act
prohibits the commercial rental, leasing or lending of software without the
express written permission of the copyright holder. Another amendment to
the Copyright Act was passed in 1992. This amendment made software piracy
a federal offense, and instituted criminal penalties for copyright
infringement of software. The penalties can include imprisonment of up to
five years, fines up to $250,000 or both for unauthorized reproduction or
distribution of 10 or more copies of software with a total retail value
exceeding $2,500 or more.
According to federal law duplicating software for profit, making multiple
copies for use by different users within an organization, and giving an
unauthorized copy to someone else is prohibited. Under this law if anyone
is caught with the pirated software, an individual or the individual’s
company can be tried under both civil and criminal law. A Civil action
may be established for injunction, actual damages (which includes the
infringer’s profits) or statutory damages up to $100,000 per infringement.
The criminal penalties for copyright infringement can result in fines up to
$250,000 and a jail term up to five years for the first offense and ten
years for a second offense. When software is counterfeit or copied, the
software developer loses their revenue and the whole software industry
feels the effect of piracy. All software developers spend a lot of time
and money in developing software for public use. A portion of every dollar
spent in purchasing original softwar!
e is funneled back into research and development of new software.
Software piracy can be found in three forms: software counterfeiting,
which is the illegal duplication and sale of copyrighted software in a form
that is designed to make it appear to be a legitimate program; Hard disk
loading, whereby computer dealers load unauthorized copies of software onto
the hard disks of personal computers, which acts as an incentive for the
end user to buy the hardware from that particular dealer; and downloading
of copyrighted software to users connected by modem to electronic bulletin
boards and/or the Internet. When software is pirated the consumer pays for
that cost by new software and/or upgrade version being more expensive.
Federal appellate courts have determined that operating systems, object
code and software contained in ROMs are protected by copyright. Some lower
federal courts have also determined that microcode (the instructions set
on microprocessor chips) and the look and feel of computer screens is
subject to copyright protection. Which has created major problems for the
widespread development of multimedia applications with regards to clearing
copyright for small elements of text, images, video and sound.
The United States Government has been an active participant in protecting
the rights of the software industry. When the Business Software Alliance
(BSA) conducts a raid, Federal Marshals or local law enforcement officials
participate as well. An organization known as the Software Publishers
Association (SPA) is the principal trade association of the PC software
industry. SPA works closely with the FBI and has also written an
enforcement manual for the FBI to help them investigate pirate bulletin
board systems and organizations (audits). With the help of the FBI, the
result of enforcement actions resulted in recoveries from anti-piracy
actions totaling $16 million since the program started in 1990.
The Software Publishers Association (SPA) funds an educational program to
inform individuals and corporations about software use and the law. This
program provides all PC users with the tools needed to comply with
copyright law and become software legal. The SPA also publishes brochures
free of charge about the legal use of software for individuals and
businesses. Also available to help corporations understand the copyright
law is a 12-minute videotape, which is composed of the most commonly asked
questions and answers to them. The video tape is available in French and
Spanish and all together over 35,000 copies of the tape had been sold.
The SPA has also compiled a free Self-Audit Kit with which organizations
can examine their software use practices. Included in the kit, is a
software inventory management program designed to help an organization
track their commercial software programs that are on all their hard disks.
The program searches the PC’s hard disk for more than 1300 of the most
common programs used in business.
Also available is the SPA Software Management Guide which helps companies
audit their current software policies, educate employees about the legal
use of software, and establish procedures to purchase, register, upgrade
and backup computing systems. The guide, in addition, provides an Internal
Controls Analysis and Questionnaire. The guide also contains all of the
SPA’s current anti-piracy materials.
The software industry is facing the challenges of more sophisticated
network environments, greater competition among software companies along
with hardware manufacturers. At this moment more software than ever before
is distributed on a high volume, mass marketed basis. There are many types
of software out on the market and the amount is increasing every day. They
range from graphical user interfaces for application programs such as mass-
market spreadsheets, to more sophisticated technical software used to
design integrated circuits. The use of software plays a more vital role in
our daily lives than it ever has. Such as embedded software, which is
critical to equipment in such locations as a doctor’s office or an
automotive shop. The instrument and devices found there depend more and
more on software, because software provides the flexibility to meet the
many different needs to the end user. As our lives our shaped and enhanced
more by technology, there is already a greater demand that impacts the
software industry.
One of the main concerns of the software industry is how to deal with the
issues of software licensing. More and more customers want customized
software suited for their business or personal need, and expect the
software development firms to accommodate to their wishes. The other side
of this issue is that software development firms are concerned with
unrealized revenue and excess costs in the form of software piracy,
unauthorized use, excess discounts and lengthened sales cycles. For the
customer and the software development firm, all of these have high
administrative costs in regards to software programs. Software licensing
policies were originally a result of software developer’s need to protect
their revenue base in the face of potential piracy. Product delivery for
software is made up of a number of different components, which are referred
to as software licensing. The following factors are taken into
consideration when determining a cost for a software license; physical
delivery pricing, metric discounts, license periods support and maintenance,
license management Tech support, change in use bug fixes and Platform
Migration Product enhancements.
The most commonly found type of software license found in business is known
as a network license. There are four types of categories that are
classified as a network license. Concurrent use licenses authorize a
specified number of users to access and execute licensed software at any
time. Site licenses authorize use at a single site, but are slowly being
phased out and replaced by enterprise licenses. Enterprise licenses cover
all sites within a corporation because of more virtual computing
environments. Node licenses are also slowly being phased out because they
are mainly used in a client/server environment, since the licensed software
may be used only on a specified workstation in which a user must log on to
in order to access and execute the software application. Currently the
trend in a network system is to use measurement software, which allows
vendors to be more flexible in licensing arrangements. This management
software monitors and restricts the number of users or clients who may
access and execute the application software at any one time. This is
significant because a user pays only for needed use and a vendor can
monitor such use to protect intellectual property. A new type of license
that is emerging is known as a currency-based license. This type of
license works on the basis that it provides to the end user a specified
dollar amount of software licenses. This allows licenses to cover
different business application software, so long as the total value in use
at a given time is less than the amount stipulated in the license.
Another type of license emerging is known as a platform-independent
licensing. Which permits software to be used on a variety of different
computer systems within a business, instead of buying a different license
for each version of the same software used by different systems. The most
common type of licensing is known as shrink-wrap, the concept behind this
that the licenses terms are deemed accepted once the end user breaks a
shrink-wrap seal or opens a sealed envelope containing the software.
A reason for these new types of licensing is that when software licensing
was first introduced, the software development firms assumed that most
businesses would use the software for a 8 to 10 hour period. Yet, did not
take into consideration that with the advancement of technology, more
businesses would want a floating license across the world for 24 hours.
This made it so it was not cost effective for the software development firm.
A floating license is a license that is made available to anyone on a
network. The licenses are not locked to particular workstations, instead
they float to modes on the network.
Shareware, freeware and public domain are different types of software
available to the end user, and are distinguished by different rules about
how programs may be distributed, copied, used and modified. The term
shareware refers to software that is distributed at a low cost, but which
usually requires a payment after a certain time period and registration for
full use. Copies of this software are offered on a trial basis, the end
user is free to try a scaled down version of the program. If the end user
wants the shareware program, included in the program is information
specifying how to register the program and what fee is required. Once
registered the end user will typically receive a printed manual, an updated
copy of the software (often with additional features), and the legal right
to use the program in their home or business. The advantage that shareware
has is that it lets the end user thoroughly test a program to see if it’s
useful before making a purchase. The !
authors of shareware programs retain their copyright on the contents, and
as other copyrighted software should not be pirated.
Freeware is also distributed at a very low cost and like shareware is found
mainly on the Internet. The authors of the freeware program do not expect
payment for their software. Typically, freeware programs are small
utilities or incomplete programs that are released by authors for the
potential benefit to others, but the drawback to this is that there is no
technical support. Public domain software is generally found on the
Internet and is released without any condition upon its use. It may be
copied, modified and distributed as the end user wishes to do.
A license manager is a system utility-like application that controls or
monitors the use of another end-user application. It is generally
implemented to protect intellectual property (meaning to stop illegal
copying) and/or to become more competitive by offering new ways in which to
evaluate, purchase and pay for software. Since the license manager
controls the number of application users, there is not a need to control
the number of application copies. This process lets the end user run one
or more applications between machines, without violating the terms of the
license agreement.
SPA has created a program that companies can use to help discover and
correct problems before they result in legal actions, fines and also
negative publicity. The eight point program is as follows:
1. Appoint a software manager to implement and monitor all aspects of
company software policy.
2. Implement a software codes of ethics for everyone to adhere to. The
ethics
should state that copyrighted software, except for backup and archival
purposes, is a violation of the law.
3. Establish a procedure for acquiring and registering software.
Determine your companies software needs, evaluate software packages, and
also have supervisors approve the plans. Keep the lines of communication
open.
4. Establish and maintain a software log. The log should state the date
of when the software was acquired, the registration of it, serial number,
network version, location of where the software is in use, where the
original is, licensing agreement and the location of the original disks.
5. Conduct periodic audits or on an as needed basis comparing the
software log and/or other purchase records.
6. Establish a program to educate and train your employees about every
aspect of software and its uses.
7. Maintain a library of software licenses and provide users with copies
of the agreement.
8. Having done the above seven points, the company can benefit by having
obtained software legally, receive full documentation, technical support
when needed and also upgrade notices.
Patents do not cover specific systems, instead they cover particular
techniques that can be used to build systems or particular features that
systems can offer. Patent grants the inventor a 17 year monopoly on its
use. Once a technique or feature is patented, it may not be used in a
system without the permission of the patent-holder even if it is
implemented in a different way. Since a computer program usually uses
several techniques and provides many features, it can infringe many patents
at once. A computer program is built out of ideal mathematical objects
whose behavior is defined, not modeled approximately, by abstract rules.
An example of this is when Borland International, Inc. complained that a
federal court decision gave Lotus Development Corp. the benefit of patent
protection to Lotus 1-2-3 menu commands and their order, but failed to
require Lotus to meet the requirements of patent law, including novelty,
examination and contribution to the prior art. The Supreme Court sided
with the decision that one entity cannot own the user interface to programs.
This would include such components as file formats, menu structures and
programming languages.
Software license agreements emerged as the most popular means of protection
of proprietary rights in computer software. They coexist with other forms
of intellectual property rights as patent and copyright. Software license
agreements serve several functions in transactions involving the transfer
of computer technology. One of the most important legal functions is the
protection of the proprietary rights of the licenser in the transferred
software. Other functions include controlling the revenue generated by
licensed software and determining the rights and responsibilities of the
parties regarding the performance of the licensed technology. Issues
related to these functions include the applicability of Article 2 of the
Uniform Commercial Code, including offer and disclaimer of warranties,
determining the appropriate types of licenses to utilize, such as single
users/CPU licenses, Site/enterprise licenses and network/concurrent
licenses.
Trade secret, copyright and patent law are static forms of protection in
the sense that they may exist independently of any underlying business
transactions and do not necessarily require any transfer of intellectual
property from one party to another. Whereas, the need for a license
agreement usually arises as one of the contractual forms of protection when
the underlying business transaction involves the transfer of intellectual
property, such as computer software. Transactions involving the transfer
of computer software are subject to both federal and provincial laws.
Generally, provincial law governs contractual and trade secrets aspects of
the transaction, while federal law governs aspects related to patent,
copyright and antitrust issues.
Each province has its own version of a trade secret, the common thread
through these province-specific laws is that if you show that you are
seriously treated information as confidential and that the confidential
information helped your competitive position, you can stop others from
using it if the information was improperly acquired by them, and even
collect damages from the wrongdoers.
A computer is useless without software. The two types of software
typically found on a computer are operating systems software and
application software. Operating system software provides an interface that
makes it easier to develop programs for the system by reducing the amount
of code that must be written. The operating system acts as an interface
between the computer hardware, application programs and the end user.
Application software consists of one or more computer programs that fulfill
a specific function for the user like word processing, bookkeeping or
financial analysis.
Two legal cases recently within the last few years has brought to light the
controversy regarding the copyright protection of software elements. Until
1992, most of the federal courts followed the decision in Whenlan v Jaslow
Dental Laboratory as a precedent for similar cases. Whenlan, a small
software company wrote a accounting program for Jaslow Dental Laboratory
company. Jaslow rewrote the software to run on personal computers and
proceeded to sell the product. The software was identical to Whenlans in
the data structures, logic, and the program structure, except for the
source code. Jaslow argued that the duplicated elements were part by the
of the idea - not the expression. The court in response felt that the data
structures, logic, and the program structure comprised to make a single
function of a computer program, therefore copyright protection should be
given to those elements also.
In 1992, this protection was weakened by Computer Associates v. Altai, Inc.
, when Altai a software developer was accused of copying various modules of
a software package developed by Computer Associates which controlled the
running of applications on IBM mainframes. The court rejected Whelan’s
premise that a computer program embodies one function because programs are
made up of sub-routines that contain their own idea. The court recognized
that this would narrow the scope of software copyright protection and
found this in accordance with the Government’s intent of computer programs
with copyright. This is why currently software copyright is not as broad
as it once was.
All the above mentioned licenses and anti-piracy precautions cost billions
of dollars each year, in both direct and opportunity costs. These costs
are shared by anybody that is involved with any aspect of the software
industry. As the future of approaches, more and more people are gaining
experience with technology. That experience doesn’t come without a price.
That price is the power to manipulate technology for personal gain which
usually results in a detriment –typically financial–to others.
Bibliography:
Brandel, William, "Licensing stymies users,"
URL:"http://www.viman.com/license/license.html#policy", Viman Software,
Inc., 1994.
Business Software Alliance, "Software Piracy and the Law,"
URL:"http://www.bsa.org/bsa/docs/soft_pl.html", Business Software Alliance,
1995.
Software Publishers Association, "SPA Anti-Piracy Backgrounder,"
URL:"http://www.spa.org/piracy/pi_back.htm", Software Publishers
Association, 1995.
Business Software Alliance, "Did You Know?," URL:"http://www.bsa.org/cgi-
-bin-bsa.org/seconds.cgi?", Business Software Alliance, 1997.
The Economist, "Slipping A Disk" URL: "http://www.economist.com/issue/27-
07-96/wbsfl.gif", The Economist, 1994.
Business Software Alliance, "Software Piracy," URL:
"http://www.bsa.org/privacy/privacy.html", Business Software Alliance, 1997.
.
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