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 

 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 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.


Brandel, William, "Licensing stymies users,"
URL:"", Viman 
Software, Inc., 1994. 

Business Software Alliance, "Software Piracy and the Law,"
URL:"", Business Software 
Alliance, 1995. 

Software Publishers Association, "SPA Anti-Piracy Backgrounder,"
URL:"" , Software Publishers 
Association, 1995.


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