Business and Technology Law

Like all audits, success in a SIIA software audit depends less on what you own and more on what you can prove that you own. Although not required by law, the SIIA takes the position that a target company is out of compliance for each installation of SIIA member software products for which the target company cannot produce a dated proof of purchase. Many clients are dismayed to discover what does and does not constitute valid proof of purchase according to the SIIA.

Not Considered Valid Proof
1. Copies of Checks to Software Vendors
2. Dated Purchase Orders
3. Undated Software Licenses
4. Credit Card Statements Evidencing Software Purchases
5. Certificates of Authenticity
6. Media, Manuals, or Key-Codes
7. Invoices Bearing and Entity Name Other than the Entity Named in the SIIA’s Initial Letter

Valid Proof of Purchase
1. Dated Invoices in the Name of the Audited Entity
2. Soft Records (online account statements) from Recognized Resellers
3. Signed and Dated License Agreements
4. Soft Records from SIIA Member’s such as Microsoft Licensing Statements
5. Cash Register Receipts for Retail Sales where Product, Version, Quantity and Price Paid are Included.

Understanding how the SIIA analyzes software audit materials is critically important to achieving the most favorable outcome. In our experience, it is the most time consuming and difficult part of the process for clients to handle on their own.

Scott & Scott, LLP is not affiliated in any way with the SIIA.

On July 13, 2010, online auction giant eBay, Inc. was sued for $3.8 billion in the United States District Court for the District of Delaware by XPRT Ventures, LLC, on claims that eBay incorporated XPRT’s patented business method processes in eBay’s payment processing technology and that eBay breached a confidentiality agreement that allegedly covered the processes in question.

The viability of XPRT’s claims will depend on a number of factors that likely will be points of contention during the litigation. Those factors include the patentability of the processes in question (especially in light of the Supreme Court’s recent Bilski opinion regarding business method patentability), the degree to which the processes incorporated into eBay’s payment methods really are encompassed, if at all, within XPRT’s patent claims, and the enforceability of the confidentiality agreement referenced in (though not attached to) XPRT’s complaint, among others.

Patent infringement claims – especially those involving patented business methods and processes – are fairly common, and especially so when a defendant, such as eBay, has deep pockets and a similarly deep dependence on technological innovation in order to remain competitive. XPRT’s claims are somewhat more incendiary than those involved in many such suits, in that they include allegations of intentional wrongdoing by eBay’s officers and attorneys. However, the case generally appears to fit within a fairly common paradigm of a relatively unknown patent holder making claims for significant monetary damages based on patented technology allegedly incorporated in some aspect of the defendant’s products or services. Microsoft’s litigation with i4i, Inc. regarding XML-related technology in its Word software is another noteworthy, recent example.

The XPRT lawsuit also has the potential to be more of a news item than the average patent-infringement suit, because it alleges that the wrongdoing in question occurred during a period of time in which California gubernatorial candidate Meg Whitman was the CEO of eBay. Recent history shows that California politics – especially those involving contests for the Governor’s Office – almost always entail explosive political drama, so it would not be surprising if the lawsuit is used as a political weapon against Ms. Whitman in the run-up to the election. However, Ms. Whitman is not named separately as a defendant in the lawsuit, and there are no allegations in the complaint that she was directly responsible for any of the allegedly wrongful conduct.

Technology-dependent firms of all types must be prepared to recognize patent exposure as a cost of doing business, and they must be ready to work closely with knowledgeable counsel to evaluate the integrity of any patents they hold as well as the validity of any patent claims with which they are presented.

Software copyright plaintiffs typically seek both permanent injunctive relief as well as damages. Recovery of statutory damages under 17 U.S.C. § 504 often hinges on whether the copyrights claimed to have been infringed before or after discovery of the alleged infringement. However, plaintiffs in competing works litigation typically seek an actual damages award, because a potential actual damages recovery often is greater. In addition, the marginal costs of developing the necessary factual record to support an actual damages award are not significant, because the underlying elements of the claim already require the devotion of significant time and effort to evidence collection and presentation. Under 17 U.S.C. § 504, a plaintiff may recover the actual damages it suffered as a result of the infringement or any profits of the infringer attributable to the infringement. Under 17 U.S.C. § 504(b), the plaintiff could recover any profits of the infringer that are attributable to the infringement. Under the statute, “in establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” Those damages could be substantial, depending on the amount of business and profit the plaintiff is able to demonstrate is attributable to use of its works. Claims for attorneys’ fees also usually are the norm, though, again, recovery may depend on whether the copyrights at issue were registered before or after discovery of the alleged infringement. Costs also may be recoverable.

Competing works cases often involve one or more primary, individual alleged infringers as well as the corporate entities with which they are associated. If the plaintiff is able to establish any actual damages as a result of infringement, all defendants could be held jointly and severally liable for those damages. In addition, the plaintiff in the action may seek to hold the individual defendants liable for the “profits” they made independently as a result of the alleged infringement. Specifically, the plaintiff could attempt to recover a portion of the individuals’ income earned while developing and/or selling the competing work at issue.

If you have received a notification from a copyright owner who is seeking damages against you, you should contact experienced counsel to preserve your legal rights.

The master service agreement for MSP's defines the terms and conditions of the relationship between the MSP and its client related to all managed services and project based work. There are several critical provisions that are necessary to protect the MSP's legal rights in a master service agreement. The indemnification provision of the master service agreement is one of the most frequenty negotiated by MSP's and their clients.

The indemnification provision of a master service agreement sets forth the risks that each party will be undertaking in the event of a claim or loss arising out of or relating to the services being provided. The indeminication section of a master service agreement frequently will say "MSP agrees to defend, indemnify, and hold customer harmless for any and all claims . . . ." End-users frequenly seek broad indemnification language from the MSP defining the scope of claims covered as broadly as possible. The MSP should be careful not to assume legal risks that can be adverse to its business in the event of a claim by it customer or a third-party. We recommend that all MSP's carry professional liability insurance and that the indemnity provisions in the master service agreement are carefully tailored to the coverages provided under the insurance contract.

For example, if the MSP has Managed Service Professional Liability insurance, the indemnity provision in the MSP Master Service Agreement should be drafted so the MSP agrees to contractually provide the same indemnities that the insurance company covers. By tailoring the indemnification to the language in the professional liability insurance, the MSP is able to offer broad indemnification to its clients without undertaking risks for which insurance has not been obtained.

2007 was an exciting and dynamic year for the software asset management industry. As we enter a new year, the software industry will continue to evolve. Here are my predictions for what will happen in 2008.

1. BSA expands its “no-fine” self-audit program
I will remember 2007 as the year that the BSA increased its reward program for “anti-piracy” leads to up to $1,000,000. With approximately fifty-five million dollars in global revenue showing on its most recent tax return, BSA will continue to be the most important software police organization in the world. Recently, BSA has created a new audit flavor, it’s a self-audit with a twist. Targets are asked to conduct an audit, provide invoices for software purchased as a result of the audit and the BSA agrees to close its file. I call this the “no-fine” self-audit because once the audit is conducted and materials produced to BSA, the file is in fact closed without protracted settlement negotiations over fines and other terms. I predict that the “no-fine” audit will be used with greater frequency 2008.

2. Microsoft Expands SAM Engagement Program
Microsoft’s SAM initiatives have replaced what used to be contractual audits. Under this program, Microsoft hires a consultant to assist the customer in conducting and audit that is the results of which are reported to Microsoft. As many clients continue to struggle to manage compliance with Microsoft licensing, Microsoft will continue to invest time and resources in various SAM initiatives. Although, I have been a critic of the certain aspects of Microsoft’s SAM Engagement, I think publishers like Microsoft that help customers deal with SAM challenges will be most successful in the long run. I think the number of variety of global SAM engagements will increase dramatically in 2008.

3. Adobe to Focus Attention on Fonts
In the recent weeks, we have started to see BSA audit letters specifically requesting audit information regarding installed fonts. Depending on the nature of your business, you may be receiving files that contain proprietary fonts licensed by your company vendors, clients, and partners when they send you documents. Frequently, these fonts wind up remaining on your computers systems creating a potential compliance issue. Adobe has an extensive portfolio of fonts that are used in its industry leading design products. I think that in 2008 the focus on font licensing compliance will continue.

4. Industry Consolidation Accelerates
As we continue to experience the economic ripple effects of the sub-prime meltdown, I think there will be an increased credit squeeze in 2008. As smaller publishers find it harder to borrow funds to fuel growth, continued industry consolidation should occur in 2008. These same economic factors may lead to increased acquisition and divestiture work for software asset managers in all industries.

5. Autodesk Stays Aggressive
In addition to participating in audits conducting by the SIIA and BSA Autodesk maintains its own “anti-piracy” program implemented exclusively by Donahue Gallagher & Woods law firm. While other publishers search for kinder and gentler enforcement strategies, I predict that Autodesk will continue to be aggressive in its approach to enforcement working through the pre-eminent anti-piracy attorneys to implement its heavy-handed strategy.

6. End-Users Benefit from Soft Economy
If the economy weakens and revenue pressure on software publishers increases, end-users will enjoy greater negotiating and bargaining power. The smartest companies will negotiate aggressively with the software industry to secure favorable pricing and licensing terms custom tailored to their business needs. In my experience, senior management at software publishers are more likely to make licensing and pricing concessions when there is a new transaction and considerable cash on the table. A soft economy will force publishers to make concessions to end-users in 2008.

7. Resellers Expand Asset Management Services
To stay competitive, software resellers have had to offer value added tools and services to assist their customers with managing the hardware and software assets they sell. The smartest resellers are learning that the more asset management tools and services they can provide the greater wallet share they will enjoy for hardware, software, and services. Dell’s purchase of ASAP Software and Insight’s purchase of Software Spectrum have started a trend that will continue in 2008.

8. Third-Party Commercial Access Licenses Go Mainstream
In 2007 Microsoft greatly expanded its reseller network for its Service Provider License Agreement Program. This program provides commercial access licenses to Microsoft technology. Traditional client access licenses (CAL) are for internal use and access only. If you provide direct or indirect access to third parties including your customers, vendors, and business partners you should consider whether you need SPLA licensing. In 2008, third party access licensing will become increasingly important under Microsoft SPLA as well as other major publishers licenses.

Robert J. Scott is the managing partner of Scott & Scott, LLP. rjscott@scottandscottllp.com

In May of 2007 Scott & Scott, LLP commissioned the Ponemon Institute to conduct a national survey titled the Business Impact of Data Breach. Out of the 720 companies that responded, 85% reported that they had experienced a data breach and 81% indicated that they suffered a privacy notice triggering event. I was surprised by the high percentage of companies that reported a data breach and alarmed by the number of companies that had notice triggering events. Implementing programs that minimize notice triggering events is easier to accomplish than many companies may realize.

Contrary to popular believe, the single largest cause of data breaches is missing portable devices such as laptops representing 42% in our survey, while criminal acts such as hacking represented only 6%. Accordingly, I have been advising my clients to implement encryption technologies on laptops and PDA’s for several years.



Most of the 38 states that currently have data privacy breach notification statutes specifically define the personal information that is subject to the statute by using the term “unencrypted” in the statute. The statutes that do not specifically exempt encrypted data in the definition of personal information have an exception for incidence where there is no reasonable probability of harm. Accordingly, if you have a laptop or PDA that is goes missing and that laptop is equipped with encryption technology you will likely have no data privacy notice obligation under state laws. Amazingly, even after suffering a data breach 46% of the companies in our survey failed to implement encryption technology.

While implementing encryption in our firm, I discovered that encryption can be expensive and disruptive to business operations. In our firm, we have experienced costs exceeding $100.00 for licensing, labor costs related to installation, and performance and reliability impacts on laptops post installation. For these reasons, I was intrigued to learn that that the major hardware manufacturers Dell, Lenovo, and HP were working with the hard-drive manufacturers such as Seagate to develop hard-drives equipped with encryption technology “out of the box.” I am now advising my clients to change their standard laptop build to include these hard-drives. The quote for my new laptop from Dell includes the following description:

Without a contractual provision to the contrary, ambiguous terms in a software license will be construed against the software publisher. Provided that there are no other business factors that would make litigation unwise, an ambiguous license agreement is the situation most likely to lead to litigation.

Construction against the Drafter
When dealing with ambiguities, it is important to determine whether the license in question contains a provision indicating that ambiguities will not be construed against the drafter. If there is no such provision, the general rule in most jurisdictions is that ambiguities in software license agreements will be construed against the drafter. If the contract is silent on construction against the drafter, it is important review any choice of law provision and determine if the specific jurisdiction follows the general rule.

Parol Evidence
The Parol Evidence Rule, which is applicable in most states, provides that when a court determines that a contractual provision is ambiguous, the parties may introduce extrinsic evidence to prove that their interpretations of the contract are consistent with the parties’ intent when entering into the contract.

In a software dispute, parol evidence will include testimony from both the software company and the end user regarding pre-contract discussions and negotiations as well as pre-contract writings including e-mails, faxes, purchase orders and draft license agreements. All of this evidence would be precluded in a contract dispute where there was no ambiguity in the contract. In such instances the court would be confined to what is called the “four corners” of the software license agreement when conducting its interpretation.

Software licenses often discuss technical matters, and are therefore frequently ambiguous. These ambiguities require the parties to develop and present extrinsic evidence in court. Typically, the evidence is developed through pre-trial discovery mechanisms such as requests for production of documents and depositions, which can be very expensive.

Triable Issues of Fact
Contract disputes, including those involving software licenses, are frequently resolved before the trial begins through motions for summary judgment. The interpretation of a non-ambiguous contract is decided as a matter of law by the court. In addition, because the parol evidence rule precludes the introduction of evidence in contravention of the plain meaning of an unambiguous contract, litigation costs are reduced because the extrinsic evidence regarding the parties’ pre-contract intent is not considered by the court.

There are some software licensing disputes that do not lend themselves to amicable resolutions. When there are millions of dollars in controversy and each party believes that it has acted within its legal rights, litigation may be unavoidable. Many times, even when litigation seems certain, the parties evaluate the various litigation considerations and conclude that they should try pre-litigation resolution strategies to see if they can, at the very least, narrow the issues.

Amount in Controversy
Until a client understands its potential exposure in a software dispute, choosing a strategy is almost impossible. The difficulty in software disputes is that a tremendous of amount of work and analysis is required to estimate the amount in controversy.

In trade association audits conducted by the BSA and the SIIA, the amount in controversy may be relatively easy to estimate because agencies typically employ mature alternative dispute resolution processes that permit accurate estimates of not only the amount in controversy but also the probable settlement range.

The amount in controversy is much more difficult to determine in other types of audit because the contractual audit provisions contained in software licenses frequently do not specify a formula for resolving any license compliance gaps following an audit. Regardless of the nature of the dispute, helping the client determine the amount in controversy is an important role for in-house and outside counsel.

Switching Costs
Perhaps the most overlooked issue when developing a strategy for a software dispute is the costs to discontinue use of a publisher’s software and switch to a competitor’s product. High switching costs for enterprise products places the software publisher in a position of strength from a practical perspective. By contrast, low switching costs or changing business requirements places the negotiating strength in the hands of the client. For this reason, publishers who have a dominant market share, such as Autodesk, are generally more aggressive in their approach to audits and litigation than those publishers operating in highly competitive markets.

Switching costs are also critically important because most software licenses contain a termination provision that will almost certainly be invoked when litigation is commenced or just prior to litigation. Termination provisions give the publisher a great deal of leverage in litigation and if the publisher is able to demonstrate that it properly terminated a software license, can bolster the publisher’s copyright infringement claims in the litigation.

Before choosing a strategy, audit targets should work with experienced counsel to conduct a careful analysis of the licenses in question and a disciplined assessment of the alternatives to using the auditing publisher’s products.

Probability of Success on the Merits
The next step in the strategy development process is evaluating the strength of the claims
on the merits. While software license disputes are generally pled as copyright infringement claims, the license agreements define the nature of the copyright holder’s grant of authority to use its products. Most matters that proceed to litigation arise because of ambiguous language in the license agreements defining the scope of the license, and it is this ambiguity that will determine the probability of success on the merits.

In many instances, the parties cannot resolve a software dispute with an audit. In some of these cases, there are contractual requirements or other considerations that cause the parties to employ traditional alternative dispute resolution frameworks to bring the decision makers to the table and try to resolve the case before a trial becomes necessary.

Mediation
Software publishers usually want to avoid costly litigation as much as end users do. Accordingly, a publisher may try to persuade the target to participate in mediation prior to commencing formal legal proceedings. Mediation can be valuable when there is an ongoing relationship between the parties, and the parties are interested in continuing the relationship.

One of the many advantages of mediation is that it can, relatively quickly, bring parties interested in resolution together. Mediations are typically shorter, more informal, and less costly. Parties with settlement authority attend the mediation with the goal of reaching a resolution and avoiding more formal, more costly arbitration or litigation.

Arbitration
In some instances, arbitration can be more favorable than litigation when resolving a
software dispute. In theory, the procedure is less formal, and in many instances, proceeds
more quickly than litigation. Either a single arbitrator or an arbitration panel considers the
issues of the matter and makes a decision that is binding on the parties. Arbitrators with
considerable software licensing experience and a general understanding of IT should be
selected for software disputes. In complex cases, the arbitrator selection process can be
time consuming and expensive.

There are also some significant disadvantages to arbitration. Initially, arbitrators are not required to follow the law when making their decisions. It is therefore sometimes difficult to accurately evaluate the probability of success on the merits. Additionally, whether and to what extent factual discovery will be permitted is almost always left to the arbitrator’s discretion. In reality, parties can spend years and hundreds of thousands of dollars arbitrating a software dispute.

Because the results in arbitration can be unpredictable, it is vital for a company to be in a position to accurately evaluate what is at risk in a software dispute to be arbitrated. The consequences for guessing incorrectly could result in an adverse award with catastrophic consequences.

In some instances, publishers who suspect their intellectual property rights are being infringed will not request an audit of the target’s network. Instead, the publishers will send a legal notice to its customer attempting to terminate their license agreement and prevent the customer from using the product. Publishers often have a contractual right to terminate the license and require customers to immediately stop using the software. A sample termination provision is below.

This Software License Agreement may be terminated (a) by your giving Altova written notice of termination; or (b) by Altova, at its option, giving you written notice of termination if you commit a breach of this Software License Agreement and fail to cure such breach within ten (10) days after notice from Altova or (c) at the request of an authorized Altova reseller in the event that you fail to make your license payment or other monies due and payable. In addition the Software License Agreement governing your use of a previous version that you have upgraded or updated of the Software is terminated upon your acceptance of the terms and conditions of the Software License Agreement accompanying such upgrade or update. Upon any termination of the Software License Agreement, you must cease all use of the Software that it governs, destroy all copies then in your possession or control and take such other actions as Altova may reasonably request to ensure that no copies of the Software remain in your possession or control. The terms and conditions set forth in Sections 1(g), (h), (i), 2, 5(b), (c), 9, 10 and 11 survive termination as applicable. See http://www.altova.com/order_license4.html.

If the software product at issue is an enterprise-wide product that cost millions of dollars, an unexpected termination notice can interrupt the business and will almost certainly escalate the dispute. Furthermore, if the businesses has unanticipated switching costs associated with identifying and researching replacement software, acquisition of the software itself, and training for employees using and supporting the software, the consequences of a termination could be devastating.

Software publishers have an arsenal of resolution frameworks at their disposal when
seeking to enforce their contractual and intellectual property rights. These frameworks
vary in terms of cost and time and are generally relative to the seriousness of the allegations and the amount in controversy. They include:

• License True Ups
• Cease and Desist Letters
• Audits
• Self Audits
• Independent Audits
• SAM Engagements
• Publisher-Staffed Audits
• License Termination
• Mediation
• Arbitration
• Litigation

License True Ups
The least adversarial software dispute resolution mechanism is a license true up. Many
software licenses contain provisions that require the end user to determine how many licenses it needs and “true up” by purchasing those licenses. True up mechanisms work best where there is an ongoing and positive relationship between the publisher and the end user and both sides have a vested interest in continuing the relationship.

Audits
A software audit is the most common software dispute resolution. The types of audits initiated by software publishers and trade associations include self audits, independent audits, software asset management (“SAM”) engagements, and publisher-staffed audits.

1. Self Audits
Self audits are the least disruptive and most predictable types software audit. They are a mechanism often employed by trade associations acting on behalf of software publishers. The trade associations, and in some instances, the publisher itself, requests that the target company conduct a self audit and report the results of the audit to the trade association or publisher.

2. Independent Audits
An independent software audit involves the use of a third-party auditor to gather the facts
relevant to the dispute. Unlike a self audit, independent audits require detailed discussions regarding confidentiality and non-disclosure agreements as well as a definition of the audit scope. Independent audits are preferred over SAM engagements and publisher-staffed audits because the auditor is usually ethically obligated to remain independent.

3. SAM Engagements
SAM engagements are also conducted by third-party auditors or consultants, but there is no obligation that the auditor in a SAM engagement be independent. Participation in a properly managed SAM engagement may be in the client’s best interest
because such engagements typically provide some flexibility and a lower total cost of resolution than self audits and independent audits.

4. Publisher-Staffed Audits
Publisher-staffed audits are the most intrusive and least impartial resolution framework. In these audits, the publisher’s employees collect information relevant to the dispute.
It is never advisable to agree to a publisher-staffed audit without examining all of the alternatives first.

License Termination
Termination of an organization’s license agreement is the publisher’s hammer and prelude to litigation. It often results in unforeseen costs to the business and escalates the dispute to higher levels.

Mediation and Arbitration
Mediation and arbitration are alternative dispute resolution processes that take place before formal legal proceedings are contemplated and may facilitate communication and out-of-court resolution.

Litigation
Litigation is surprisingly uncommon between parties with ongoing business dealings of any kind. Both the publisher and business are eager to avoid the steep costs associated with litigation.

A variety of resolution frameworks are available to businesses involved in a software license dispute. An audit is the most common such framework and entails an analysis of the organization’s network for software installations compared against its licenses. The types of audits initiated by software publishers and trade associations include self audits, independent audits, software asset management (“SAM”) engagements, and publisher-staffed audits.

Self Audits
Self audits are the least disruptive of all software audits. They are a mechanism often employed by trade associations acting on behalf of software publishers. The trade associations, and in some instances, the publisher itself, requests that the target company conduct a self audit and report the results of the audit to the trade association or publisher. Companies that agree to conduct a self audit must inventory the applicable software on the computers within the scope of the audit and report the number of installations, the number of licenses, and the number of license deficiencies.

When evaluating whether you should cooperate or litigate after a request for a self audit, you should consider the benefits of a self audit compared to the other types of audits. For instance, in publisher and third-party audits, you usually have a contractual obligation to participate in the audit and provide information to the auditors. When conducting a self audit, you have some control over the timing of the audit and the allocation of resources. That flexibility is not always present in other types of audits.

Additionally, outside auditors are not always required to be impartial and may submit incomplete or inaccurate audit results. For these reasons, regardless of the type of audit requested by the software publisher, companies faced with an audit should request the opportunity to provide a self audit rather than an independent audit, a publisher-staffed audit, or (usually) a SAM engagement.

Independent Audits
An independent software audit involves the use of a third-party auditor to gather the facts
relevant to the dispute. This audit method may be the most costly and time consuming option for the audit target.

Many software licenses incorporate audit provisions allowing the software publisher to request an independent audit. Such provisions must be carefully analyzed to determine the potential business impact of the audit and liability that may result from the audit.

In an independent audit, the organization has no input into the selection of the auditor, how long the audit will last, or the scope of the materials the auditors may review. The target company must also bear the costs of the audit if the auditor finds a licensing discrepancy of more than 5%. If the auditors conclude there is a discrepancy, the publisher has the contractual authority to unilaterally determine the license price for the software necessary to become compliant. Independent audits have significant business impacts and should be avoided if possible. Nonetheless, independent audits are preferred over SAM engagements and publisher-staffed audits because the auditor is usually ethically obligated to remain independent.

SAM Engagements
SAM engagements are also conducted by third-party auditors or consultants, but there is no obligation that the auditor in a SAM engagement be independent. The software publisher requests that the target allow a third party to audit its software installations and report the results directly to the publisher. In these engagements, the publisher pays the auditor, and the target is required to purchase licenses to cover any deficiencies in its software licenses. Microsoft’s SAM engagement has been extensively used in lieu of traditional software audits with mixed reviews from the end user’s perspective.

Participation in a properly managed SAM engagement may be in the client’s best interest
because such engagements typically provide some flexibility and a lower total cost of resolution than self audits and independent audits. In many instances, the publisher seeks no compensation for alleged past infringements in exchange for an agreement to come into compliance on a go-forward basis.

Publisher-Staffed Audits
Publisher-staffed audits are the most intrusive and least impartial of all software audits. In these audits, the publisher’s employees collect information relevant to the dispute. In many instances, publishers request a company’s confidential information or access to a
company’s network to conduct the audit. Although a publisher may arguably have a contractual right to request that it be allowed to examine its customers’ computer network, it is never advisable to agree to a publisher-staffed audit without examining all of the alternatives first.

It is no surprise that the open source software community has been shaken by the litigation begun by SCO. To begin with, Caldera Systems, the corporate entity now doing business as SCO, originated as an open source company whose only product was based on Linux. Therefore, the open source software community feels betrayed by a company whose interests it once shared and supported.

If SCO wins it fundamental claim that it owns the underlying source code to UNIX, the open source software community will lose control over one of its most used programs. To the open source software community, the loss comes not only in the UNIX source code but the many man-hours invested by subsequent developers in customizations and derivations built on the original UNIX source code.

Because the open source software community depends on the free exchange of intellectual property within the source code, a system that works only if each developer that contributes to the whole has sufficient access to the intellectual property, a win for SCO could threaten the very model of open source software. The open source software model breaks when one developer contributes an infringing work, because as SCO has claimed, every user thereafter is infringing.

What does this mean for a company using or developing open source software? First, a company must know that it may be liable for copyright infringement even without knowledge that a work was subject to copyright infringement. Like any other software the company uses, the company must know where the software originated from. However, unlike most software programs where the company has assurance from a license that the vendor owns the copyright in the source code and the company, through the license, is allowed to use the software, with open source software the SCO litigation means that a company must complete some due diligence regarding the chain of title of the source code of the open source software to ensure that there are no other intellectual property claims to the source code.

To show that a mark is used in commerce, a plaintiff must prove that the mark “is used or displayed in the sale or advertising of services and the service are rendered in commerce.” 15 U.S.C. § 1127(2). The issue in internet marketing cases is whether using a mark to generate search-result links and sponsored links is considered use “in commerce.” If you are faced with a trademark infringement claim related to internet marketing it is important to evaluate this defense.

In Merck & Co. v. Mediplan Health Consulting, Inc., 425 F. Supp. 2d 402, 415 (S.D.N.Y. 2006), the defendant used the plaintiff’s mark, “ZOCOR” as a search-engine keyword to generate sponsored links. The court found that as a matter of law, this type of use was not use in commerce, but rather “an internal use of the mark.” Based on the plaintiff’s failure to show use of the mark in commerce, the court dismissed the plaintiff’s trademark claim and declared that use of “a key word to trigger the display of sponsored links is not use of the mark in a trademark sense.” Id.

A successful defense based upon no use in commerce can result in an early disposition of a case because unlike many trademark infringement defenses this is a legal issue decided by the court on a pre-trial motion to dismiss or for summary judgment.

In order to win under Anti-Cybersquatting statute, a plaintiff must prove the defendant (a) had a “bad faith intent to profit from the mark,” and (b) registered or uses a domain name that is “identical or confusingly similar” to the mark in question. 15 U.S.C. § 1125(d)(1)(A)(i)-(ii). Much of this turns on whether the defendant operates in the same goods as the plaintiff.

For example, in Bally Total Fitness Holding Corp. v. Faber, 29 F. Supp. 2d 1161 (C.D. Cal. 1998), the defendant operated a website under the name “ballysucks.com,” a website dedicated to complaints about the plaintiff’s Bally’s health-club business. The court found that even though the plaintiff and the defendant both hosted websites on the internet using the term “BALLY” in the domain name, the parties did not operate in “related goods.” Id. at 1163. The court concluded “[n]o reasonable consumer comparing Bally’s official web site with [the defendant]’s site would assume [the defendant]’s site to come from the same source, or thought to be affiliated with, connected with, or sponsored by the trademark owner.” Id. at 1163-65.

When faced with a claim under the Anti-Cybersquatting statute it is very important to evaluate an argument that the defendant does not operate related goods.

In order to win under Anti-Cybersquatting statute, a plaintiff must prove the defendant (a) had a “bad faith intent to profit from the mark,” and (b) registered or uses a domain name that is “identical or confusingly similar” to the mark in question. 15 U.S.C. § 1125(d)(1)(A)(i)-(ii). Much of this turns on whether the defendant operates in the same goods as the plaintiff.

For example, in Bally Total Fitness Holding Corp. v. Faber, 29 F. Supp. 2d 1161 (C.D. Cal. 1998), the defendant operated a website under the name “ballysucks.com,” a website dedicated to complaints about the plaintiff’s Bally’s health-club business. The court found that even though the plaintiff and the defendant both hosted websites on the internet using the term “BALLY” in the domain name, the parties did not operate in “related goods.” Id. at 1163. The court concluded “[n]o reasonable consumer comparing Bally’s official web site with [the defendant]’s site would assume [the defendant]’s site to come from the same source, or thought to be affiliated with, connected with, or sponsored by the trademark owner.” Id. at 1163-65.

When faced with a claim under the Anti-Cybersquatting statute it is very important to evaluate an argument that the defendant does not operate related goods.

On the highest level, open source is the principle to allow free access to the intellectual property of the design of products to promote creativity. The term is now most often associated with software. Open source software is source code that is made available to the general public with relaxed or no intellectual property restraints that would keep another person from customizing the source code for their particular use or from building on the original source code to make use of the software for their particular use.

In early 1998, the industry leaders of the open source movement met at an event that would later become known as the “Open Source Summit.” This meeting led to the organization of the Open Source Initiative, a non-profit corporation formed to advocate the benefits of open source software. According to the Open Source Initiative, whether software can be considered open source really depends on the distribution terms of the open source software.

To meet the standards of the Open Source Initiative, the distribution terms of open source software must meet the following criteria:

1. The open source software license cannot restrict any party from selling or giving away the software as a component of another software program containing programs from several different sources and the license cannot require any fee for sale.

2. The open source software must include source code and must allow distribution of the source code.

3. The open source software license must allow modifications and derivative works, and, importantly, must allow the modifications and derivative works to be distributed under the same terms as the license of the original software.

4. The open source software license may restrict source code from being distributed in modified form only if the license allows distribution of patch files with the source code for the purpose of modifying the program at build time. The license must permit distribution of software built from modified source code.

5. The open source software license cannot limit use to any person or group of people.

6. The open source software license cannot limit use in any field, such as for commercial purposes.

7. The rights attached to the open source software must apply to all whom the program is redistributed without the need for execution of an additional license.

8. The open source software license cannot be specific to a product.

9. The open source software license cannot place restrictions on other software that is distributed with the open source software.

10. The open source software license cannot demand that a specific technology be used with the software.

Not long ago a small software company offered a big cash reward to anyone who read the End User License Agreement (or EULA) for their software product. The catch: you have to read the EULA to even know about the offer.

PC Pitstop buried a clause in their EULA that offered the reward to anyone who sent a message to the enclosed email address. The point was to prove that people rarely, if ever, read their software licenses. They were right – four months and 3,000 downloads later, one sharp-eyed end user finally wrote in and claimed the $1,000 prize. See http://www.pcpitstop.com/spycheck/eula.asp

Software developers are well aware of the fact that the end users who buy their products rarely read their license agreements. Many people are surprised to discover that the EULAs for their software might contain provisions granting the software company the right to conduct an onsite software audit with no notice, waive important consumer rights or other draconian measures which they would never knowingly agree to.

But this trend is changing as more IT professionals discover the importance of understanding their EULAs. Before Windows VISTA was released, Microsoft made the EULA publicly available. Not long after the IT community was in an uproar over some of the proposed provisions, including one that only allowed the end user to transfer the installation to a new system once (upgrading your existing system could constitute such a transfer as well). After that, you’re done. Want to transfer that software twice, or make a couple of upgrades? Go buy another copy of Windows then. That was essentially what the new license stated.

So what happened when the IT community raised their concerns? Not long afterwards, Microsoft removed the EULA and replaced it with a new, more user friendly version. See http://www.securityfocus.com/columnists/420.

This is an important development; as IT professionals and attorneys continue to scrutinize these agreements, software developers will increasingly bring their licenses in line with consumer expectations. These examples prove that it can (literally) pay to read those license agreements.

The primary benefit of a software patent is the broad protection provided by the patent laws. An owner of a software patent may prevent all others from making, using, or selling the patented invention. In connection with software, an issued software patent may prevent others from utilizing a certain algorithm without permission, or may prevent others from creating software programs that perform a function in a certain way.

In contrast, copyright law can only prevent the copying of a particular expression of an idea. In connection with computer software, copyright law can be used to prevent the total duplication of a software program, as well as the copying of a portion of software code, which would be literal infringement. Copyright law does provide some protection against non-literal infringement; however, courts have recently been reluctant to interpret copyright protection of computer software in a broad manner. In addition, the basic tenet of copyright law is that copyright will protect only the expression of an idea, and not the idea itself. Therefore, copyright law will not prevent the creation of a competing program that utilizes the same ideas as an existing program if the expression (the code) is different.

As a result, a software patent can provide much greater protection to software developers than copyright law. The benefits of obtaining patent protection can be extraordinary. As more developers understand the potential of software patents, more patents are being issued. According to the Software Patent Institute, thousands of software patents are being issued every year, covering such areas as business software, expert systems, compiling functions, operating system techniques, and editing functions.

There are limitations to obtaining a software patent. A patent can only be issued when an invention is new, useful, and nonobvious. In addition, obtaining a software patent can be an expensive process, costing ten thousand dollars or more. The choice of whether to pursue a software patent or copyright protection for software should be made by comparing the value of the program to the cost of the patent application process and the likelihood of obtaining significant patent protection.