If you suspect the software you or your company created is being pirated by unscrupulous customers, then you should take action. Here’s how to do that.
Often overlooked in the coverage of software piracy is the act of softloading, which occurs when a business customer purchases a single user license and loads the software onto multiple desktops or servers. Dealing with such infringement is a complex undertaking, but the losses that can be recouped may make it a worthwhile pursuit.
The latest results from the Software Publishers Association’s study on software piracy indicate that Canada is ranked ninth in the world in terms of highest dollar losses due to software piracy.
Last year, the software piracy rate in Canada was 39 per cent compared to 27 per cent in the U.S. Total North American losses were estimated at US$3.1 billion. For developers, the adverse effects of software piracy are an erosion of sales revenue and a reduction of monies reinvested in product research and development.
When software is installed, the customer does not normally acquire ownership rights. The customer is only a licensee subject to the terms and conditions in the license agreement. Therefore, any unauthorized use is a violation of copyright for which the customer would be liable for infringement and civil damages. What then are the legal options for a software developer or publisher?
Remedies for Developers
Management must diligently work with their IT professionals, sales force and foreign resellers to uncover evidence of unauthorized use. Field workers should regularly report any irregularities or illegal use to management for further investigation.
If the findings suggest that a customer may have used a product without a proper license, you must decide whether legal action is required to recover lost revenue.
The first step is to weigh the evidence in your favour, including witnesses. In particular, ask whether your evidence translates into a specific number of unauthorized site licenses.
The next step is to send the infringing party a “cease and desist” letter. Typically, the letter will contain: a) the number of new site licenses required for legal compliance, b) a demand for a written IT audit report of all software assets, especially in a large enterprise system, c) instructions that the customer not destroy any software currently installed on its computers, and d) a warning that the customer not purchase new upgrades or additional support before the dispute is resolved.
If you receive an IT audit, determine whether the report is credible by comparing the results with your evidence. If your evidence is strong, you may wish to obtain a court order permitting a search and seizure of the customer’s place of business for incriminating documents or digital evidence, provided there is a real possibility that the customer may destroy such material.
At some point during the litigation process, you may wish to negotiate a settlement. If this is the case, you should be aware of some common tactics.
In the event that the licensee does not provide an IT audit report, impose a “deletion penalty” for each unauthorized copy that is not reported which squarely contradicts your evidence.
In determining the cost per license, use the Manufacturer’s Suggested List Price (MSLP) as leverage for higher damages. The MSLP is usually 25 to 30 per cent higher than actual reseller prices. Therefore, the MSLP price is a de facto penalty. Keep in mind that any new “purchase” should be characterized as an offer to settle a lawsuit and not as a transaction in the ordinary course of business.
The settlement sum should also include legal costs and other damages. Often these costs are cloaked as a contribution to the developer’s Piracy Prevention Fund or Recovery Fund.
If your demand requires payment of punitive damages, consider that clear malice or fraud must accompany copyright infringement under the Copyright Act. Also, a demand for punitive damages should take into consideration any mitigating factors.
If a written settlement agreement is contemplated, ensure that any default proceedings can be brought in your “home” jurisdiction.
Issuing a demand or claim against a customer requires a delicate balancing act. Ideally, you will recover lost revenue while maintaining profitable customer relationships. At the end of the day, each case will have a litigation “threshold,” that is, where the benefit of litigation will justify the costs of pursuit — especially in a foreign jurisdiction.
Mancinelli practices law in Toronto with an emphasis on information technology, business law and IT-related civil litigation. He can be reached at [email protected].