IP: After the Software Audit

David LevittqYou've received the letter from the Business Software Alliance (BSA), the Software & Information Industry Association (SIIA) or some other software trade group or vendor, having been "turned in" anonymously by a former employee. You've decided to voluntarily audit your software, and learned that you have some unauthorized software on your servers. You report this to the software-owning entity. Now what? How much is owed for the asserted copyright infringement?

The answer will often depend, in large part, on why the unauthorized software is present, and the knowledge of those who put it there and of management. Nonetheless, there are a few common themes of which business owners should be aware.

Under the Copyright Act, a copyright owner who has timely registered its work has several available remedies. These include damages, attorney's fees, injunctive relief and destruction of the infringing articles. The copyright owner is likely to allude to all of these in its settlement demand letter.

Regarding damages, the owner has two options: (a) actual damages plus the infringer's profits attributable to the infringement, or (b) statutory damages. Most of the time, the copyright owner opts for statutory damages in its settlement demand letter, alluding to the possibility of damages up to $150,000 per infringed work for willful infringement. Typically, though, the calculation of those statutory damages is based on the manufacturers suggested retail price (MSRP), with a multiplier then applied, and an amount added for attorney's fees. In addition, such letters invariably also assert that the company must destroy its unauthorized copies and purchase new licenses if it desires to use the software, essentially doubling the cost to the company.

Target companies have solid grounds for contesting these demands. Assuming statutory damages, there is little support for application of a multiplier. It is well settled that statutory damages should bear some relation to the actual damages suffered.

Often, the owner's demand letter will include a string cite of cases that have purported to apply one, but upon review, those cases do not so hold. Some of these cases mention that statutory damages may be more than the actual damages, because one of the goals of damages in copyright cases is deterrence as well as compensation, but none of them calculate damages by applying a multiplier to some supposed measure of actual damages. Further, in most instances, there is either clear evidence of willful infringement by the defendant, or the ruling was entered in the context of a default, where the defendant did not appear to contest its liability or damages.

The starting place for the owner's calculation, MSRP, also presents grounds for dispute. First, the copyright owner is typically not the retailer, but one who distributes to retailers who then distribute to the public. The copyright owner never receives MSRP; even the retailer rarely gets it. The copyright owner's loss - its "actual damage" - is its profit, a relatively small percentage of MSRP. Since statutory damages should bear some relation to actual damages, even where a multiplier is to be applied, the starting point should be the profit amount, not MSRP.

As to attorney's fees, Section 505 of the Copyright Act does allow them to the prevailing party, but at the court's discretion. Willfulness or bad faith conduct is not required for attorney's fees, but such conduct is a factor that courts use in determining whether or not to grant this award. Especially where there is no evidence of willfulness, or where the target company has acted promptly to try to make things right upon learning of the existence of unauthorized copies, courts have shown a reluctance to award attorney's fees.

Finally, there is little support for requiring destruction of the unauthorized copies where the target company is agreeing to pay for software. Courts applying Section 503(b) of the Copyright Act have done so in the context of distributors or sellers of the infringing software, rather than to companies who are merely using the software for their own purposes. There is a body of law, primarily patent cases, which holds that once a party compensates the rights holder for use of the product in the context of resolving an infringement claim, it obtains an implied license for the use of the product. We have not found any cases which have required a user to destroy copies of the software after agreeing to pay for them, and then re-purchase licenses again.

This is not to say that companies that have installed unauthorized software ought not to pay for that conduct. The remedy, however, must fit the offense, and often the initial volley by the rights holder entity has been overreaching and based on principles that courts would be unlikely to allow in the context of copyright litigation.

Read David Levitt's previous column.

David Levitt

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