Software Licensing and Piracy-

In 1993 worldwide illegal copying of domestic and

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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


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


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


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


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 [email protected] 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.



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