Scott & Scott Audit Blogs

Attachmate Customers Should Prepare for Audit Demands

2011-10-12T21:48:54Z

Businesses deploying software published by Attachmate Corporation should strongly consider making an effort now to review their license-compliance status. Attachmate is a major player in markets for various IT-infrastructure software solutions, and it has demonstrated its willingness to pursue litigation in support of its copyright-enforcement interests. For example, in April 2008, Attachmate pursued and reached a $1.1 million settlement with the State of Montana after an audit revealed unlicensed software use on state-owned computers.

In addition, Attachmate currently is in the midst of pursuing a $2.2 billion acquisition of Novell, Inc., but that transaction has stalled out recently due to a protracted patent review being conducted by the U.S. Department of Justice. The review is part of the government's due-diligence efforts surrounding the required sale (for antitrust purposes) of 882 patents to a Microsoft-led consortium of competing vendors. As a result, many observers see an increasing likelihood of audit activity going forward - it is not uncommon for software publishers to try to increase revenue through license-enforcement activities. In addition, Novell software is widely deployed throughout many businesses' IT environments, resulting in what Attachmate's compliance department likely is expecting to be a fertile hunting ground for software audits.

Attachmate customers should use any distraction of Attachmate's legal department to their advantage and take steps now to ensure that their software usage-levels do not exceed their license rights. Compliance gaps typically are much easier and less expensive to remedy before a software owner makes first contact regarding an audit, the efficient resolution of which often involves the assistance of counsel.

Federal Judge Upholds USPTO's Suspension of Lawyer

2011-10-12T21:47:51Z

The United States District Court for the District of Columbia affirmed on January 4 the U.S. Patent and Trademark Office's five-year suspension of an attorney. The USPTO excluded attorney John Halvonik of Rockville, Maryland from practicing before the USPTO for five years on a finding that Halvonik violated a number of provisions of the USPTO's Code of Professional Responsibility, which includes disciplinary rules governing conduct of attorneys practicing before the Office. The USPTO found that Halvonik committed multiple willful and egregious acts of professional misconduct in violation of the Code, including commingling client and personal funds, failing to promptly refund client fees that had not been earned, and neglecting to prosecute client matters in a timely manner. "Attorneys must be careful to abide by the rules of professional conduct of their state bar and any agency or office before which they practice," says Julie Machal-Fulks, partner at Scott & Scott, LLP. "The USPTO received complaints about Halvonik and thereafter concluded he had engaged in misconduct." For more information, please contact Ms. Machal-Fulks at 800-596-6176 or jfulks@scottandscottllp.com.

Responding to Autodesk Audits

2011-10-12T21:47:10Z

The BSA and SIIA are not the only organizations pursuing business for software copyright infringement. Though it is a member of both the BSA and SIIA, Autodesk, which manufactures the popular design software AutoCAD, often pursues audit targets on its own.

The audits begin much like those instituted by the BSA or SIIA. The target of Autodesk's audit will receive a letter from a law firm representing Autodesk demanding the business' cooperation in disclosing the number Autodesk installations on its network and the number of Autodesk licenses it owns, including serial numbers. The law firm will assert it has received information that indicates the business may have more installations of Autodesk software than it is licensed to use. The letter will go on to describe the various penalties associated with copyright infringement and it may threaten the business with civil litigation.

Targets who receive such letters should treat the matter very seriously. It is important to know your legal rights and protect your legal position before responding to a request for information from a software publisher who is trying to conduct an audit. Additionally, many companies who prepare their own responses to Autodesk without the benefit of counsel and before conducting a thorough investigation often receive an unexpectedly high settlement offer from Autodesk.

In many cases, Autodesk demands a settlement payment calculated as the MSRP of the allegedly unauthorized products installed on the business' network multiplied by three. The multiplier, Autodesk argues, is the penalty for using unauthorized software and is assessed in lieu of proceeding with formal judicial resolution. The use of multipliers as an approximation of damages is a hotly contested issue.

When responding to Autodesk audit requests, companies should work with experienced counsel to thoroughly investigate the software usage on their computers, protect themselves by requesting agreement from Autodesk regarding the use of the materials that will be produced in the audit, and negotiate a resolution geared toward ensuring future compliance.

Autodesk Audit: The Importance of Serial Numbers

2011-10-12T21:46:13Z

Autodesk products are typically upgraded frequently and Autodesk usually issues a new, unique serial number with each purchase. When responding to an Autodesk audit, the business that owns Autodesk products may elect to provide the serial numbers in lieu of the invoices. It is important to provide serial numbers for the versions of the products that are installed and in use as of the date of Autodesk's letter. For instance, if a company upgraded a copy of AutoCAD ® 2000i to AutoCAD ® 2004, the company should not provide both serial numbers to Autodesk in response to the audit request.

It is also important to realize that Autodesk licenses are generally non-transferrable without Autodesk's written permission. If an audited company is planning to produce a serial number for a product that was not obtained from an authorized Autodesk reseller, there is a strong likelihood that the company will not get credit for the license.

If you have been audited by Autodesk, please seek advice from experienced counsel before responding. For more information, please visit www.scottandscottllp.com.

The Risks of IBM Sub-Capacity Licensing

2011-10-12T21:40:33Z

I am an intellectual property attorney specializing in defending end-users in software audit matters including those initiated by IBM. We get hired by targets of IBM audits to facilitate the flow of information and protect the client's interest in the audit process. The most significant compliance claims we have encountered arise under Virtualization Capacity (Sub-Capacity) License terms in IBM's Passport Advantage Licensing offering. According to IBM, Sub-Capacity licensing "allows flexible software licensing using advanced virtualization capabilities such as shared processor pools, micro-partitioning, virtual machines and dynamic reallocation of resources." Sub Capacity Licensing is very attractive in data center environments because "it enables customers to license software for only the processor core capacity available to the partition hosting the IBM software." Although very attractive, Sub-Capacity licensing can create very significant legal liability under two common fact patterns.

1. Customer Purchases for Sub-Capacity but servers are not capped - in this scenario IBM entitlements are purchased under certain assumptions regarding the server capacity and eligibility for sub-capacity licensing. For whatever reason during the initial deployment or afterwards the hardware is not capped and the processor core capacity available to the partition hosting the server software is much greater than originally believed resulting in significant financial exposure under IBM's Processor Value Unit (PVU) calculations.

2. Customer Purchases for Sub-Capacity but fails to deploy ILMT - in this scenario IBM entitlements are purchased under the assumption of eligibility for sub-capacity licensing and is correctly deployed using appropriate capping. However, because the client fails to deploy the ILMT discovery tool or to otherwise maintain the required monthly reports, IBM claims that customer owes for the full capacity of the hardware under PVU calculations notwithstanding the use of capping. IBM argues that because IBM Passport Advantage PVU-based offerings license terms require ILMT reports be created, verified, adjusted, signed, and saved, any customer that fails to comply with the ILMT requirements forfeits it's rights to use sub-capacity licensing and therefore owes as if the hardware had not been capped.

While there are many issues that arise in IBM audits, the issues involving sub-capacity licensing are the most prevalent and involve the most financial exposure based upon our experience.

Brasher's Idaho Auto Auction

2011-10-12T21:39:39Z

Brasher's Idaho Auto Auction vs. SIIA, et al.

In Brasher's Idaho Auto Auction vs. Software & Information Industry Association, Adobe Systems, Corel, McAfee, Symantec, Idaho Auto Auction, ADP, and Robert William Gillespie filed in U.S. District court for the District of Idaho (Case #1:11-cv-00310-REB), the plaintiff, a target of an SIIA audit, is asking the court to determine who is legally responsible for the unlicensed software found on its computers during the audit.

The outcome of this Complaint for Declaratory Judgment of Non-Infringement and Judicial Finding of Damages filed on July 7, 2011 should shed some light on how to apportion legal liability for copyright infringement damages related to business software usage.

Brasher's purchased the assets of Idaho Auto Auction, which included some computers that contained unlicensed software. Plaintiff alleges they were unaware of this. Unfortunately, lack of knowledge or intent is usually not a good defense to a copyright infringement claim where liability attaches without regard to fault or knowledge.

Plaintiff is seeking indemnity and/or contribution from Idaho Auto Auction; ADP, a company who provided software to Brasher's and/or Idaho Auto Auction which SIIA claims to infringe the copyrights of its members; and its former IT administrator, Gillespie, and presumed informant for his role in installing the software.

The case against the informant is always a tough call. Most unemployed IT guys are usually not viable defendants. It will be interesting to see how receptive the court is to Brasher's claim that the former IT administrator should be individually liable for software he installed in violation of the companies policy.

Brasher's is suing the SIIA for continuing to reject their settlement offers and demanding excessive settlement amounts despite lack of intent on their part. The SIIA's multiple of MSRP approach to software audits is under direct attack. In our opinion, the court may be receptive to Brasher's claim that an arbitrary multiple of MSRP is not appropriate for calculating damages in software copyright infringement cases.

This case highlights the importance of due diligence and properly documenting asset transactions involving the sale of computers with software installed.

How the court apportions liability for any acts of infringement between Brasher's , Idaho Auto Auction, Gillespie, and ADP may affect future software litigation cases.

Complete copy of complaint.

Who Gets Sued for Software Compliance Violations?

2011-10-12T21:38:43Z

A recent Northern District of Idaho case should shed some light on how to apportion legal liability for copyright infringement damages related to business software usage.

In Brasher's vs. The Software & Information Industry Association, Adobe, Corel, McAfee, Symantec, Idaho Auto Auction, ADP, and Robert Gillespie, plaintiff Brasher's, the target of an SIIA software audit, filed suit asking the court to determine who is legally responsible for unlicensed software found on its computers during the audit. Brasher's sues Gillespie, a former IT administrator and presumed informant for his role in installing the software and seeks indemnity from Idaho Auto Auction the company it acquired assets from which included computers with unlicensed software.

This lawsuit provides some valuable lessons.

(1)The plaintiff claims it had no knowledge that the computers contained allegedly infringing software when it acquired the computers. Lack of knowledge or intent is usually not a good defense to a copyright infringement claim when liability attaches without regard to fault or knowledge.

This case highlights the importance of due diligence and properly documenting asset transactions involving the sale of computers with software installed.

(2) The plaintiff alleges that the former IT administrator installed unlicensed software in violation of company policies. He was subsequently terminated and thereafter informed SIIA that Brasher's had pirated software on their computers. The plaintiff alleges a very common fact pattern: IT administrator is terminated and makes a software piracy complaint against the former employer to the SIIA.

It will be interesting to see how receptive the court is to Brasher's claim that Gillespie should be individually liable for software he installed in violation of the company's policy. The case against the informant is always a tough call. Most unemployed IT guys are not viable defendants.

(3)The plaintiff alleges that the SIIA repeatedly made demands for payment several times the total retail price of the software and far in excess of any damages suffered by SIIA's members. Brasher's claims that they repeatedly offered to settle with the SIIA, including an offer of $12,500, despite the fact that the retail price of the software allegedly infringed is less than half that amount and that the SIIA rejected their settlement offers.

The SIIA's multiple of MSRP approach to software audits is under direct attack. I think the court will be receptive to Brasher's claims that an arbitrary multiple of MSRP is not appropriate for calculating damages in software copyright infringement cases.

Intel and Nvidia Resolve Patent Dispute With License Agreement

2011-10-12T21:37:33Z

A patent infringement battle between Intel and Nvidia started in 2009 when the chip maker sued Nvidia regarding a chipset license agreement between the two companies that allegedly was not valid for Intel's then-current and future generation CPUs with integrated memory controllers. Nvidia responded, alleging that the suit was part of Intel's plan to push competitors out of the market. The two companies have resolved their dispute with a $1.5 billion software license agreement in which each party will license some of its technology to the other. Intel and Nvidia will gain access to parts of each others' patent portfolios (excluding Intel x86 designs and flash memory). "Software license agreements are excellent tools for helping companies with valuable software products resolve a dispute and find a mutually beneficial arrangement," says Scott & Scott, LLP managing partner Robert Scott. "License agreements need to be carefully negotiated documents in order to allow companies to leverage their intellectual property and gain access to technology previously out of reach or deemed too costly to develop independently." For more information, please contact Mr. Scott at 800-596-6176 or rjscott@scottandscottllp.com.

Working On A License Agreement? Don't Skimp On The License.

2011-10-12T21:26:00Z

If you are working on a license agreement, don't forget to carefully define what is and is not included within the scope of the license. "Scope creep" has the potential to contaminate the parties' understanding of what the license includes and to damage the parties' relationship. License agreements almost always include provisions to protect the parties, to provide for indemnity, to define appropriate limitations of liability, to set the extent of any warranties, and to set rules and effects of termination, but the license provision itself often receives inadequate attention.

The parties should ask themselves and each other: What may the licensee do with the licensed product? What may the licensee not do? May only certain individuals associated with the licensee use the licensed product? Don't be afraid to delve into details. If the license includes a product with an accompanying service, clearly define the product and the service (some products and services appear inseparable at first glance, but it is usually possible to differentiate them in some meaningful way). If the license is for software, may the licensee make copies of the software for its internal use? May the licensee run older versions of the software for legacy systems? May the licensee run the software in multiple virtual environments simultaneously? If the license is for a complete technology solution, will the licensee have access to the technology platform, or will the licensor deliver the solution to the client from a secure environment under its exclusive control?

License agreements that incompletely define the scope of the license may result in disagreement and even litigation between the parties at a later date. It is almost always a good idea to seek the advice of knowledgeable IP counsel when drafting or reviewing such documents.