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Software Licensing


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
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
Product delivery for software is made up of a number of
different components, which are referred to as Asoftware
licensing@. The following factors are taken into
consideration when determining a cost for a Asoftware
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 , ANetwork@ 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, Acurrency-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
Aplatform-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 AShrink-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 Afloating@ 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 Alocked@ 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 Ashareware@ 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
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
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 Aprovides@ 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

Brandel, William, "Licensing stymies users,"
Viman Software, Inc., 

Business Software Alliance, "Software Piracy and the Law,"
URL:"http://www.bsa.org/bsa/docs/soft_pl.html", Business
Software Alliance, 

Software Publishers Association, "SPA Anti-Piracy
URL:"http://www.spa.org/piracy/pi_back.htm" , Software
Publishers Association, 



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