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Common defenses in a software licensing audit cases

Jun 11th, 2015 | By | Category: Software Licensing Audits

Software Licensing Defenses in BSA, Microsoft, SIIA and Autodesk audits!

Software license audit lawyers

Introduction

What do you do when you get a legal demand letter from a law firm asking your company to audit all of your servers, networks, servers, and laptops and report back on what software programs you have on each, and to prove (with dated receipts) that you paid for each license properly?  The first thing you will probably want to do is “lawyer up.”  This is for protection and does not mean you are GUILTY of software piracy.  It means you are concerned and need to know your legal rights, potential legal exposure to officers and directors, and to discuss possible legal defenses that may apply to your case.  This blog discusses some of the main defenses that might arise in a software licensing audit case with the Business Software Alliance, SIIA, Microsoft, Autodesk or other software publishers.

Key document: If you are facing a software compliance investigation, download this handy audit checklist of 30 questions every company must ask before deciding whether to agree to perform the audit and fill out the spreadsheet..

Common defenses that may arise in software infringement cases

Keep in mind, some of these defenses are used to show that your business is properly licensed. Some are to show that there is no willful copyright infringement (which is the holy grail that the intellectual property lawyers for the software publishers are hoping to get you on in order to try to increase the monetary damage award).  It is always better to be an “innocent infringer” as opposed to being labelled as a “software pirate” (which can happen when your software audit worksheet indicates widespread use of crack codes, ex. using number 696969696).  Watch this video if this describes your company:

69696969 crack codes

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1.  Lost receipts: failure to maintain receipts proving every piece of software your company has ever purchased over its lifetime happens, and this can be a common defense in a software audit case).  The defense is less successful if there are large amounts of unlicensed software or a long list of bootleg copies that appear to have used “crack codes” to get them working.  In one case we believe the “secret informant” was the one who stole the receipts before being fired.

2.  Mergers and acquisitions: the company or companies being acquired had software license shortages, and the new company has failed to properly account for software licenses as part of the due diligence process.  In some cases, the acquiring company has assumed no liability (we saw this a lot of this defense in various banking cases we have handled) for the past infringing conduct of the acquired company, and the acquired company is no longer a legal entity.  As mentioned, in some of the banking cases, when the old company was found to be a bad actor, the new company that acquired the old company purchased via contract “all the assets but not the liabilities” as a matter of contract law.  We had a very difficult time fighting this assertion by the banks and their counsel.

3.  Software as a perk – In some cases you might see free copies of software provided to company in return for services provided (for example an Autodesk contractor may have given out a free copy of AutoCad or Revit Architecture in exchange for services rendered, and was informed that they could legally use the software).  A company should not have to pay for these perks and gifts.

4.  Trade-show giveaway – As another example, a company may have been authorized to download and install the software as a gift, give-a-way, or perk (ex. a trade-show giveaway).

5.  Nefarious activities of a IT contractor – For example a company may have merely downloaded demo copies of the software for evaluation purposes, for example on download.com (and assume the software was not used to generate profits to the company) and had no idea the software was being used without being paid for.  This can happen where a division of a company decides to try out a new piece of software they saw in an advertisement, for example, then decided not to use it.  Then, unbeknownst to the owners of the company, someone (ex. employee, or IT contractor), figured out a way to get the software working without paying for it (ex. an online crack code).  Instead of simply making a demo use, the company may wind up using the software without a proper license and by the time the officers and directors figure it out, it is TOO LATE, the letter comes.

NOTE:  There may be times when the conduct of third party contractors need to be closely examined.  We have seen what we believe to be a “career-informant” who installs software telling the business owner everything is legit, and then months later turn the customer into a software publisher such as the BSA or SIIA seeking a reward against the company.  Since these companies do not like to disclose who their informant is (we have discussed this in other blogs), how would anyone know if this is the type of person who reports software infringement almost like a second job?

6.  Employees goofing around – A Company was growing very rapidly and software was inadvertently downloaded in violation of company policy.  Some companies simply grow to fast, and in the chaos of the growth spurt, inadvertently end up with unlicensed software on their network servers, laptops, PC’s, etc.  Sometimes a student version is installed and eventually misused inadvertently.  We had one case where an intern from Nigeria of all places, was hired by a U.S. company (based out of New York as I recall) and the owner did not know about the software and assumed that this temp student employee went back to her homeland country and possibly turned in the boss for some unknown reasons.  Truth is stranger than fiction sometimes.  But these are things that should help us negotiate a better deal, where it is 100% clear there is no willful copyright infringement.

7.  Corporate sabotage and retaliation – These are the worst and most contentious cases.  Software was installed by the “informant” in order to seek to recover a monetary damage award or to retaliate against the company.  In some cases conduct can amount to outright extortion.  As noted above, even with these LESS THAN CREDIBLE THUGS as witnesses, the software companies will do everything possible to hide and conceal the identity of the “informant,” (who is often painted to us as your copyright counsel), as the most honorable and trustworthy person in the world (even though apparently the lawyers have never even met the informant on a face to face basis and have never vetted their credibility or veracity as a witness).  Yet even so, they will try to hide and conceal their identity at all cost asking us instead to “trust them, the information is reliable and has reliable evidence of license shortages”  This is what we refer to as the “probable cause evidence,” where is it?  Why do we trust this witness?  Does the informant have a criminal background?  Are they a vexatious informant?

Note: When the company suspects they know who the informant is (sometimes it is even thought to be a CURRENT employee, which is amazing), and when their computers are checked, illegal activity had been found and theft of proprietary information or trade secrets, violation of company policy, and even defamation needs to be looked at.  Needless to say, the credibility and veracity of the informant can become an issue in some cases but you need to have an experienced counsel to know when to push this button.  Sometimes these employees may report software piracy (with a motive to receive a reward) in violation of employment severance agreements, non-disclosure agreements and employment termination agreements which can include strict confidentiality clauses and possibly liquidated damages clauses and injunction rights.  As your counsel, we will be exploring these angles.

Bonus materials:  Click here to learn more about suing the informant hell-bent on corporate espionage and stealing trade secrets.

8.  A total failure to even be using the software they claim you are using – we have seen cases where a software publisher claims someone is using their software illegally and in violation of the U.S. Copyright law (again usually accompanied by the “trust me we have the information” response,) and yet the company CLEARLY HAS NEVER USED THE SOFTWARE AND DOES NOT HAVE IT INSTALLED on any of their servers, networks, computers, laptops or otherwise.  This, of course, is disturbing and these cases might be settled by having the company sign a “certificate of compliance.”  We have a special letter prepared for this occasion known as the software fishing expedition response letter.

9.  Trojan horse – One thing that could possibly happen is that a company simply has no clue how a particular piece of software was uploaded onto their computer systems (possibly by a virus or computer hacker or by having some trojan horse introduced into the corporate IT environment) and simply does not use the software at all in their business, and nobody really knew who installed it or why its there, and yet someone just started using it.  While this is unlikely, it is a possibility in a world internationally connected and globally competitive where employees with all sorts of motives, intents, and knowledge levels are doing things in the spare time.  For a time, software audits with Rosetta Stone language learning software was an issue were employees were learning second languages on company time hoping to leave the company for better opportunities.  It is a dog-eat-dog world out there, and sometimes the company is the one wearing the milk bone underwear if you know what I mean.

10.  Software bundles – At times we have had clients inform us that a particular piece of software may have been downloaded on Bittorrent.com (peer to peer file sharing website) or another internet website, and the Autodesk or Microsoft Software (for example) or other types of additional software was unknowingly and inadvertently downloaded but never used.  This software can then sit on your computer and when your software on your hard-drive gets shared with others in the “swarm” when the copyright holder learns of this you can unwittingly become a copyright infringer and risk responding to a legal demand letter.

11..  Career informant – This was discussed above, but since I fee this happens alot (who knows for sure if the informants are anything legit or not)?  As such, they cannot be trusted.  Some companies have hired IT contractors from Craigslist or other Software IT sites (one we heard was geek squad being a possible source) to install Autodesk  or Microsoft products claiming they are all legitimate(the Craiglist installer is a scam artist and is the one who installed additional copies of the software, then called in to get the reward to the NO PIRACY hotlines which you can find on facebook and other internet websites).

12.  ONLINE SOFTWARE BUY / SELL – [ex. Copy purchased on eBay, Amazon.com or Etsy thought to be legitimate] – For example a company buys expensive software on the internet on a website such as Craigslist, Ebay, Amazon.com or Etsy believing that they are paying a fair price (albeit obviously a low than MSRP price which the software companies may argue gives the appearance of pirating software).  Nevertheless, the software company gets wind of the purchase (possibly via an informant) and wants to file a lawsuit for infringement.  The company argues they were just getting a good deal on software.  The software company may also argue that the online seller had no legal right to sell the software and thus there is no valid sale.  These cases can get tricky, but may also be a case that can be resolved fairly if the lawyers play fair and reasonable (some of the IP lawyers we deal with will play fair and sone will not, choosing instead to play the role of bully).

These cases may also involve what appear to be “authorized resellers” but it turns out they are not. In these cases, I would argue the software companies should “police” their own brand and software better, send a DMCA take down letter, and get their damages from the perpetrator posing as legitimate seller, (not from a company CEO, CFO, CTO or CIO that legitimately believes they were buying someones software who had a right to sell it).

Related defense:  If you were the buyer and believe you purchased software from a valid reseller (not a pirate site), you may need to look at whether or not the seller held themselves out as an authorized representative of the accuser.  They could be held liable as the “ostensible agent” of the company that is going after you.

This reverse situation can happen where it is the Seller that is being accused of infringement (violating the copyright owners exclusive right to distribute copies of their copyrighted work) and we have seen deceptive conducts that is “entrapment” like in nature, with the software company using “undercover agents” to make the purchase and then seek to file an infringement action.  Here is a copyright watchdog video episode we did on this topic.

Selling pirated software online

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Where the seller is being targeted and pressured with legal demand letters, the “First Sale Doctrine” may be at issue and this can provide a legal defense to any infringement action, but this will usually only apply where the seller was the OWNER of the software and not a LICENSEE, and thus had a legal right to transfer title so to speak and legally sell the software.  We have talked about this on other blogs and if you are concerned about this or facing this situation contact us to discuss the case.

13.  Fake software compliance company – yes, believe it or not there are even internet scams and fake “copyright bullies” out there.  Persons or businesses who may be living the good life in the Cayman Islands sending software demand letters to thousands of people seeing who might send back money or a signed agreement to “settle” their case, when in fact the company if completely bogus or a legitimate scam company. In some cases we may need to demand that an alleged “software compliance company” prove who they are, and who they represent and what the basis of their claim may be.

14.  Proper licensing / Consent of software publisher – in some cases you may have the proper licenses and are able to show you are in complete or substantial compliance with all the terms of your EULA and that the audit is simply improper.  In these cases, if it goes to court, the software publisher should be required to pay YOUR ATTORNEY FEES!

15.  Copyright misuse –  According to Wikipedia – Copyright misuse is an equitable defense against copyright infringement in the United States allowing copyright infringers to avoid infringement liability if the copyright holder has engaged in abusive or improper conduct in exploiting or enforcing the copyright. Copyright misuse is comparable to, and draws from precedents under, the older doctrine of patent misuse, which dates back to the early years of the 20th century and derives from the more general equity doctrine of “unclean hands”, which bars a party from obtaining equitable relief (such as an injunction) against another when the party has acted improperly (though not necessarily illegally).

The doctrine forbids the copyright owner from attempting to extend the effect or operation of copyright beyond the scope of the statutory right (for example, by engaging in restrictive licensing practices that are contrary to public policy, particularly the public policy of copyright law).  Courts do not permit a copyright owner that has engaged in misuse to enforce its copyright—whether by securing an injunction against infringers or collecting damages for infringement, until the misuse has been “purged”—that is, the improper practice has been abandoned and its effects have fully dissipated.  See Apple Inc. v. Psystar Corp., 658 F.3d 1150, 1158-59 (9th Cir. 2011)

16.  Abandonment – According to Wikipedia:

“Abandonment is recognized as the explicit release of material by a copyright holder into the public domain. However, statutory abandonment is legally a tricky issue which has little relevant case precedent to establish how an artist can abandon their copyright during their lifetime. The more common approach is to license work under a scheme that provides for public use rather than strictly abandoning copyright. Copyright protection attaches to a work as soon as it is fixed in a tangible medium, whether the copyright holder desires this protection or not. Before the Copyright Act of 1976 an artist could abandon or forfeit their copyright by neglecting to comply with the relevant formalities. Difficulty arises when one tries to apply the doctrine of abandonment to present-day concerns regarding the abandonment or gifting of a digitized work to the public domain. The abandonment of a work is difficult to prove in court, though Learned Hand proposed a test which parallels other forms of abandonment law wherein an author or copyright holder could abandon their work if they intend to abandon it and commit an overt act to make public that intention  Despite this test, the current legal environment towards protectionism is so strong that a court might disregard an author’s statements regarding their intent

17.  Gift (implied license) – something has happened that has led you to believe you were properly able and allowed to use the software at issue;

18.  Estoppel / Waiver – the software company has done something that made you believe you had authority to use the software (especially over time) and you were relying on that, and not they cannot deny you.

19.  Unclean hands a party has acted in bad faith or done something wrong, if your “hands are unclean” you may not be able to recover, even if you were the copyright holder.  One example which might be worth considering, is it POSSIBLE that a software company would ever set up a “Free download site” that allows a company to use “crack codes” to access expensive software, and then 6 months later come back and send the company that did the downloading a “audit demand letter?”  While this may seem far-fetched, it is something that should be considered in the serious software infringement case, or even in a criminal copyright case.

While this is not to shed a negative light on Autodesk (a company we respect very highly as they seek to enforce their intellectual property rights), I will direct you to this video which shows ONE WEBSITE that I found which allows persons to download the Autocad software and provides free “crack codes.”  When you go to the WHOIS to see who owns the domain, I found that the site is PRIVATELY registered.  It is a question worth raising – if I can find the website, I am assuming anyone can find the website, and I can only wonder why it has not been shut down.  Again, this is not in any way shape or form meant to imply misconduct, unclean hands, or copyright misuse, but it does raise an important public issue – BE CAREFUL ON THE INTERNET.  Using crack codes can also infect your company with spyware or malware and lead to charges of circumventing access control technologies per the DMCA.  Click to watch the video:

Autodesk software audit lawyer

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20.  Embedding: Software is properly licensed (for example in an embedded product of another company).  We settled one Autodesk software case on this basis.  The client purchased software that was paid for but the software purchased had Autodesk software embedded in the product, but my Client had no license for Autodesk.  We still do not know how the figured this out, but there was no illegal usage, and we had to back track it to the developer who was able to confirm the embedded license.  False charge case.

Yes, these types of things can happen and may arise as a potential defense in your case.  There are other potential defenses not listed above, so contact us to discuss your case by calling us at the number below or filling out the contact form.  If you are being accused of being short on CAL licenses, or other software shortages, we can help review your case for possible defenses and to avoid allegations of copyright infringement and to protect against officer and director liability for alleged willful copyright infringement.  Keep in mind, some of these defenses may work better to rebut claims of WILLFUL copyright infringement, which would help reduce or lessen damages in settling your case.

21.  The use is permitted by a license (ex. you may have virtualization management software that is allowed to be used FREE for limited commercial use).  If you are using within the scope of the license, there can be no infringement.

22.  Volume licensing may cover your usage (ex. Microsoft Volume license covers the alleged infringing use)

23.  Your company is NOT bound to engage in the audit.  Why?  Someone from your company (a non-officer or director – someone WITHOUT the power to bind the company, was the party that agreed to the EULA.  This should not be deemed to be enforceable on the company itself any more than if an employee when out and tried to sell the company and signed the purchase and sale agreement. NOT bound = no reason for us to engage.  Other situations may arise where an “authorized reseller” sells you pirated or bootleg software and may or may not have given you a EULA that the software publisher may now be claiming you are bound by (maybe even claiming you have to submit to an onsite audit or raid you might as well call it).  The facts of these cases need to be closely examined.

24.  “Fair Use” defense to copyright infringement.

25.  Online retail sales of software (accusing the purchaser of being a willful copyright infringer), when it appears the online retailer was an “ostensible agent” of the software company.  Thus, they should be liable to police their online sales and getting a great deal online should not be akin to infringement.

Here are a few other possible defenses to raise in a software or copyright infringement audit or lawsuit:

Software defense attorney

26.  Statute of limitations (three years) – in other words “we installed the software in 1998” and don’t know how, when or why this was installed or what we paid for it.

27.  Repeated turnover of IT staff – example software usage and licensing got “out of control” because we had several different CTO’s, CIO’s, or IT managers coming and going.  This will help reduce the “willful” part of an infringement allegation.

28.  Company growth spurts took eye off licensing ball – Some companies either grow too fast, or may have merged with another company and sometimes software licensing issues can take a back seat.  This can also help negate a “willful” copyright infringement inference and possibly help reduce damages.

Contact a Software Audit Defense Law Firm

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As you can see, we are a leader in the software audit business.  No other firm can provide quality service, proven results, bona fide federal court experience, and numerous sample reviews and testimonials. When it comes to this area of law, there simply is not substitute for experience.  Be careful of the newer “copycat” lawyers out there that are hanging their shingles professing to have experience in this area of the law.  If they cannot show you a content-rich website that demonstrates passion, and the energy and leadership to help your company, steer clear and call us at the number below BEFORE YOU SPEAK WITH THE ATTORNEYS FOR THE SOFTWARE COMPANY.  We can help you learn your software audit rights!

We can help you fight your case against the BSA, SIIA, or Microsoft or other software company that may be bearing down on you forcing your business to perform a “voluntary audit” at risk of being sued in federal court for $150,000 damages per infringing work.  This heavy-handed type of conduct threatens to hold business owners, officers, and directors personally liable and can at time raise the risk that a company will have to file for chapter 13, 7 or 11 bankruptcy protection to survive the audit.  This is serious business of course and can threaten to bankrupt companies who are simply not “copyright pirates” as the software companies and their attorneys may tend to characterize it or paint them out to be.  We are here to help you defend these charges and accusations.

We offer low and affordable flat rate fees in most cases.  We can be reached at (877) 276-5084.  Or, fill out the contact form below to have one of our intellectual property lawyers contact you, normally within the hour.

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We are a business and civil litigation firm with a focus on copyright infringement cases involving illegal movie downloads (torrent cases such as London Has Fallen, ME2 Productions and Malibu Media defense), software audits (ex. Microsoft audits, SPLA, Autodesk audit notification letter, Siemens PLM defense, SIIA, Adobe and Business Software Alliance defense) and other software vendors threatening piracy and infringement. We also handle cases involving internet law, anti-SLAPP, media law, right of publicity, trademarks & domain name infringement, and we have a niche practice area handling California BRE licensing disputes, accusations, subpoena response, statement of issues and investigations. We have offices in San Francisco, Beverly Hills, Newport Beach, San Diego & Phoenix, Arizona and accept federal copyright and trademark cases nationwide. All content on our website is general legal information only and not a substitute for legal advice, and should not be relied upon. Decisions to hire counsel should not be based on advertising alone. Blogs, videos and podcasts are authored by Steve Vondran, Esq. unless otherwise noted. We can be reached at (877) 276-5084.

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