Unlicensed Software - Hidden Liability for Copyright Infringement

Many business owners are surprised to learn that their companies can be held liable for unauthorized software installed by employees on their companies’ computers.  In a 2001 study, the BSA Business Software Alliance, Inc. d/b/a BSA | The Software Alliance, a trade group of software publishers, estimated that 37% of all companies nationally have unlicensed software installed on their computers.  These unlicensed software installations can result in substantial liability for copyright infringement.

Unlicensed software is large problem for software publishers.  BSA | The Software Alliance reports that in 2000, software publishers lost $2.6 billion to software piracy.  In that same year, software piracy cost 118,000 jobs, $5.3 billion in lost wages, and $1.8 billion in lost tax revenue.  In Texas alone, it has been estimated that the piracy rate is 17.9% causing $139 million in lost retail sales.

The consequences of software piracy to companies can be equally severe.  Unauthorized duplication of computer software products for simultaneous installation or use constitutes copyright infringement.  Under the Copyright Act, the maximum nonwillful damages per work infringed are $30,000.  See 17 U.S.C. § 504.   Where the copyright owner proves the infringement to be willful, a court has discretion to increase the award of statutory damages up to $150,000 for each infringing copyrighted product.  In addition, the Act provides for the recovery of attorneys’ fees by the prevailing party.  See 17 U.S.C. § 505.

It is important to keep in mind that the above potential damage awards are per infringed work only.  For example, if a company is shown to have unlicensed installations of 10 different copyrighted software titles, its damages could total $300,000 if nonwillful infringement is proven, and $1.5 million if the infringement is shown to be willful.  In addition to these statutory damages, the company could also face an award of hundreds of thousands of dollars of attorney’s fees if the dispute goes to trial.

Personal Liability for Copyright Infringement for Corporate Officers and Directors

Corporate officers and directors should also be concerned with individual liability.  Where an officer or director is shown to have a financial interest in the outcome of the business and is shown to have supervised or directed the infringing activities, the officer or director can be held personally liable.  Filing for bankruptcy, in most cases, will not alleviate this liability because liability for willful copyright infringement is generally held to be non-dischargeable.

Recent settlements illustrate the significance of liability for copyright infringement.  In February 2001, a Federal Court in Illinois awarded Microsoft $1.5 million in a software piracy case against Chicago-based Logical Choice Computers Inc. for distributing counterfeit copies of various Microsoft products.  Another dispute ended when four Texas companies agreed to pay a combined total of $439,302.35 to settle claims that they had unlicensed copies of software programs installed on office computers.

Who are the watchdogs enforcing software rights?  BSA | The Software Alliance (www.bsa.org) and the Software & Information Industry Association (www.spia.org) are just two organizations that dedicate their resources to preventing software piracy.  In addition, software companies such as Microsoft, Novell, and others have established their own watchdog programs in an effort to protect their software.

Who should be concerned with this issue?  Any company with current or former employees has a legitimate concern.  Often times, a company with unlicensed software is reported by ex-employees and vendors.

Steps Companies can Take to Reduce Liability for Copyright Infringement

What can companies do to avoid this problem?

1. Institute a software-monitoring program

Every company should consider instituting a program to monitor the software installed on its computers.   In addition to monitoring software, this program should include developing a software policy that is clearly explained to all employees in a written document and through internal training and seminars.  Each employee should sign a software “code of conduct” as part of his/her employment agreement.

     2.  Organize and manage records

Every company should have a clearly defined system for organizing and managing all records of licenses for purchased software and all proofs of purchase.  Every user must have a license and all software should have have a proof of purchase readily accessible.

1. Conduct frequent self audits

Regular audits of the company’s computers should be a priority.  There are a number of commercially available products to assist in this process.  GASP® is one such product that can be found at www.bsa.org/usa/freetools/gasp.  It is far cheaper to remedy unlicensed software discovered during a self audit than during trial.

1. Be proactive

Company management should be proactive in implementing preventative measures.  One safeguard is purchasing software that prevents employees from installing unlicensed software.

1. Outsource it

Business owners should consider outsourcing software management to a third-party provider.  If an outside source is hired, however, the company should require indemnity from the third-party provider in the event that it installs unlicensed software.

1. Exercise due diligence

If a company acquires computers or software through an asset or stock purchase, care should be taken to ensure that all of the purchased software is properly licensed.  Failure to investigate this is a common mistake.

Copyright infringement is a costly and time-consuming matter.  The costs of implementing a thorough software-monitoring program are often far less than the costs of a copyright-infringement lawsuit.

Klemchuk LLP is an Intellectual Property Law, Litigation, and Transactions law firm.  The firm offers comprehensive legal services including litigation and enforcement of all forms of IP as well as registration and licensing of patents, trademarks, trade dress, and copyrights.  The firm also provides a wide range of technology, Internet, e-commerce, and business services including business planning, formation, and financing, mergers and acquisitions, business litigation, data privacy, and domain name dispute resolution.  

Klemchuk LLP also publishes the following blogs: Intellectual Property Law, Conversations with Innovators (interviews with thought leaders), Leaders in Law (discussions on timely law topics), and Culture Counts (thoughts on law firm culture and the business of the practice of law).