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Software Licensing and Piracy
In 1993 worldwide illegal copying of domestic and international
software cost $12.5 billion to the software industry, with a loss of $2.2
billion in the United States alone. Estimates show that over 40 percent of
U.S. software company revenues are generated overseas, yet nearly 85
percent of the software industry's piracy losses occurred outside of the
United States borders. The Software Publishers Association indicated that
approximately 35 percent of the business software in the United States was
obtained illegally, which 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
software 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 at 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, pursuant to
Constitutional grant of legislative 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 state law, and most jurisdictions have laws
that criminalize the violations of a trade-secret holder's rights in the
secret. The definition of a trade secret varies somewhat from state to
state, but commonly have the same elements. For example, AThe information
must be secret, Anot 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 or if the
holder does not take adequate precautions to protect the secret.
In 1964 the United States 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, Congress 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,
and 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. Title 17 to the United States Code 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 Copyright Office in Washington, D.C. for the program to
be protected as copyrighted. With that in mind then a copyright is a
property right only. In order to prevent anyone from selling your software
programs, you must ask a court (federal) 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 Public Law 101-650) was
approved by Congress in 1990, this Act prohibits the commercial rental,
leasing or lending of software without the express written permission of
the copyright holder. An amendment to Title 18 to the United States Code
was passed by Congress in 1992. This amendment. Known as Public Law 102-
-561 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.
Under United States 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 or both. 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 software 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 very expensive.
Federal appellate courts in the U.S. have determined that operating
systems, object code and software cotained in ROMs are protected by
copyright, and 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 leads
to the problems of the widespread development of multimedia applications
that has brought out major problems in 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 also. 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 an written
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 a 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. 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 hard
disks. The program searches PC hard disks 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 also provides
an Internal Controls Analysis and Questionnaire. The guide also contains
all of the SPA's current anti-piracy materials. The U.S. 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 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 daily in
our lives such as embedded software, which is critical to equipment in
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 Asoftware 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, both have high administrative
costs in regards to software programs. Software licensing policies were
originally a result of software developers' 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 authorized 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 work on the basis that
it provides to the end user a specified dollar amount of software licenses.
For example, licenses for different business application software, so long
as the total value in use at a given time is less than dollars. Another
type of license emerging is known as a 'platform-independent' licensing,
which one license 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 emerging 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 - thus 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 Afloat to modes on the network.
Shareware, freeware and public domain are different type 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 requires usually 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 a 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 Borland International, Inc. complained in the
1st Federal District Court 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 1st Circuit decision that one entity cannot own the user
interface to programs. Meaning such 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. Issue 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
Astatic@ 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 state laws. Generally, state law
governs contractual and trade secrets aspects of the transaction, while
federal law governs aspects related to patent, copyright and antitrust
issues. Each state has its own version of a doctrine of a trade secret,
the common thread through these state-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 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 program 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 of 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 this would narrow the scope of software copyright
protection and found this in accordance with Congressional intent of
computer programs with copyright. This resulted in why currently software
copyright is not as broad as it once was.
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.
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