Software Licensing


Software Licensing Essay, Research Paper

In 1993 worldwide illegal copying of domestic and international software cost $12.5

billion to the software industry, with a loss of $2.2 billion in the United States

alone. Estimates show that over 40 percent of U.S. software company revenues are

generated overseas, yet nearly 85 percent of the software industry’s piracy losses

occurred outside of the United States borders. The Software Publishers Association

indicated that approximately 35 percent of the business software in the United States

was obtained illegally, which 30 percent of the piracy occurs in corporate settings.

In a corporate setting or business, every computer must have its own set of original

software and the appropriate number of manuals. It is illegal for a corporation or

business to purchase a single set of original software and then load that software onto

more than one computer, or lend, copy or distribute software for any reason without the

prior written consent of the software manufacturer. Many software managers are

concerned with the legal compliance, along with asset management and costs at their

organizations. Many firms involve their legal departments and human resources in

regards to software distribution and licensing.

Information can qualify to be property in two ways; patent law and copyright

laws which are creations of federal statutes, pursuant to Constitutional grant of

legislative authority. In order for the government to prosecute the unauthorized

copying of computerized information as theft, it must first rely on other theories of

information-as-property. Trade secret laws are created by state law, and most

jurisdictions have laws that criminalize the violations of a trade-secret holder=s

rights in the secret. The definition of a trade secret varies somewhat from state to

state, but commonly have the same elements. For example, AThe information must be

secret, Anot of public knowledge or of general knowledge in the trade or business, a

court will allow a trade secret to be used by someone who discovered or developed the

trade secret independently or if the holder does not take adequate precautions to

protect the secret.

In 1964 the United States Copyright Office began to register software as a form

of literary expression. The office based its decision on White-Smith Music Co. v.

Apollo , where the Supreme Court determined that a piano roll used in a player piano did

not infringe upon copyrighted music because the roll was part of a mechanical device.

Since a computer program is textual, like a book, yet also mechanical, like the piano

roll in White-Smith, the Copyright Office granted copyright protection under the rule of


In 1974, Congress created the Natural Commission on New Technological Uses

(CONTU) to investigate whether the evolving computer technology field outpaced the

existing copyright laws and also to determine the extent of copyright protection for

computer programs. CONTU concluded that while copyright protection should extend beyond

the literal source code of a computer program, evolving case law should determine the

extent of protection. The commission also felt copyright was the best alternative among

existing intellectual property protective mechanisms, and CONTU rejected trade secret

and patents as viable protective mechanisms. The CONTU report resulted in the 1980

Computer Software Act, and the report acts as informal legislative history to aid the

courts in interpreting the Act.

In 1980 The Copyright Act was amended to explicitly include computer programs.

Title 17 to the United States Code states that it is illegal to make or to distribute

copies of copyrighted material without authorization, except for the user=s right to

make a single backup copy for archival purposes. Any written material (including

computer programs) fixed in a tangible form (written somewhere i.e. printout) is

considered copyrighted without any additional action on the part of the author.

Therefore, it is not necessary that a copy of the software program be deposited with the

Copyright Office in Washington, D.C. for the program to be protected as copyrighted.

With that in mind then a copyright is a property right only. In order to prevent anyone

from selling your software programs, you must ask a court (federal) to stop that person

by an injunction and to give you damages for the injury they have done to you by selling

the program.

The Software Rental Amendments Act Public Law 101-650) was approved by Congress

in 1990, this Act prohibits the commercial rental, leasing or lending of software

without the express written permission of the copyright holder. An amendment to Title

18 to the United States Code was passed by Congress in 1992. This amendment. Known as

Public Law 102-561 made software piracy a federal offense, and instituted criminal

penalties for copyright infringement of software. The penalties can include

imprisonment of up to five years, fines up to $250,000 or both for unauthorized

reproduction or distribution of 10 or more copies of software with a total retail value

exceeding $2,500 or more.

Under United States law duplicating software for profit, making multiple copies

for use by different users within an organization, and giving an unauthorized copy to

someone else – is prohibited. Under this law if anyone is caught with the pirated

software, an individual or the individual=s company can be tried under both civil and

criminal law. A Civil action may be established for injunction, actual damages (which

includes the infringer=s profits) or statutory damages up to $100,000 per infringement.

The criminal penalties for copyright infringement can result in fines up to $250,000

and a jail term up to five years for the first offense and ten years for a second

offense or both. When software is counterfeit or copied, the software developer loses

their revenue and the whole software industry feels the effect of piracy. All software

developers spend a lot of time and money in developing software for public use. A

portion of every dollar spent in purchasing original software is funneled back into

research and development of new software. Software piracy can be found in three forms:

software counterfeiting, which is the illegal duplication and sale of copyrighted

software in a form that is designed to make it appear to be a legitimate program; Hard

disk loading, whereby computer dealers load unauthorized copies of software onto the

hard disks of personal computers, which acts as an incentive for the end user to buy the

hardware from that particular dealer; and downloading of copyrighted software to users

connected by modem to electronic bulletin boards and/or the Internet. When software is

pirated the consumer pays for that cost by new software and/or upgrade version being

very expensive. Federal appellate courts in the U.S. have determined that operating

systems, object code and software cotained in ROMs are protected by copyright, and some

lower federal courts have also determined that microcode (the instructions set on

microprocessor chips), and the look and feel of computer screens is subject to

copyright protection. Which leads to the problems of the widespread development of

multimedia applications that has brought out major problems in clearing copyright for

small elements of text, images, video and sound..

The United States Government has been an active participant in protecting the

rights of the software industry. When the Business Software Alliance (BSA) conducts a

raid, Federal Marshals or local law enforcement officials participate also. An

organization known as the Software Publishers Association (SPA) is the principal trade

association of the PC software industry. SPA works closely with the FBI and has also an

written enforcement manual for the FBI to help them investigate pirate bulletin board

systems and organizations (audits). With the help of the FBI, the result of enforcement

actions resulted in recoveries from anti-piracy actions totaling $16 million since the

program started in 1990.

The Software Publishers Association (SPA) funds a educational program to

inform individuals and corporations about software use and the law. This program

provides all PC users with the tools needed to comply with copyright law and become

software legal. The SPA also publishes brochures free of charge about the legal use of

software for individuals and businesses. Also available to help corporations

understand the copyright law is a 12-minute videotape, which is composed of the most

commonly asked questions and answers to them. The video tape is available in French and

Spanish and all together over 35,000 copies of the tape had been sold.

SPA has also compiled a free Self-Audit Kit with which organizations can examine

their software use practices. Included in the kit, is a software inventory management

program designed to help an organization track their commercial software programs that

are on all hard disks. The program searches PC hard disks for more than 1300 of the

most common programs used in business.

Also available is the SPA Software Management Guide which helps companies audit

their current software policies, educate employees about the legal use of software, and

establish procedures to purchase, register, upgrade and backup computing systems. The

guide in addition also provides an Internal Controls Analysis and Questionnaire. The

guide also contains all of the SPA=s current anti-piracy materials.

The U.S. software industry is facing the challenges of more sophisticated

network environments, greater competition among software companies along with hardware

manufacturers. At this moment more software than ever before is distributed on a high

volume, mass marketed basis. There are many types of software out on the market and

increasing every day. They range from graphical user interfaces for application

programs such as mass-market spreadsheets, to more sophisticated technical software used

to design integrated circuits. The use of software plays a more vital role daily in

our lives such as embedded software, which is critical to equipment in locations as a

doctor=s office or an automotive shop. The instrument and devices found there depend

more and more on software, because software provides the flexibility to meet the many

different needs to the end user. As our lives our shaped and enhanced more by

technology, there is already a greater demand that impacts the software industry.

One of the main concerns of the software industry is how to deal with the issues

of Asoftware licensing@. More and more customers want customized software suited for

their business or personal need, and expect the software development firms to

accommodate to their wishes. The other side of this issue is that software development

firms are concerned with unrealized revenue and excess costs in the form of software

piracy, unauthorized use, excess discounts and lengthened sales cycles. For the

customer and the software development firm, both have high administrative costs in

regards to software programs. Software licensing policies were originally a result of

software developers= need to protect their revenue base in the face of potential piracy.

Product delivery for software is made up of a number of different components,

which are referred to as Asoftware licensing@. The following factors are taken into

consideration when determining a cost for a Asoftware license@; physical delivery

pricing, metric discounts, license periods support and maintenance, license management

Tech support, change in use bug fixes and Platform Migration Product enhancements.

The most commonly found type of software license found in business is known as

a , ANetwork@ license. There are four types of categories that are classified as a

network license.

Concurrent use licenses authorized a specified number of users to access and execute

licensed software at any time. Site licenses authorize use at a single site, but are

slowly being phased out and replaced by enterprise licenses. Enterprise licenses cover

all sites within a corporation because of more virtual computing environments. Node

licenses are also slowly being phased out because they are mainly used in a

client/server environment , since the licensed software may be used only on a specified

workstation in which a user must log on to in order to access and execute the software

application. Currently the trend in a network system is to use measurement software,

which allows vendors to be more flexible in licensing arrangements. This management

software monitors and restricts the number of users or clients who may access and

execute the application software at any one time. This is significant because a user

pays only for needed use and a vendor can monitor such use to protect intellectual

property. A new type of license that is emerging is known as a, Acurrency-based@

license. This type of license work on the basis that it provides to the end user a

specified dollar amount of software licenses. For example, licenses for different

business application software, so long as the total value in use at a given time is

less than dollars. Another type of license emerging is known as a

Aplatform-independent@ licensing, which one license permits software to be used on a

variety of different computer systems within a business, instead of buying a different

license for each version of the same software used by different systems. The most

common type of licensing is known as AShrink-wrap@, the concept behind this that the

licenses terms are deemed accepted once the end user breaks a shrink-wrap seal or opens

a sealed envelope containing the software.

A reason for these new types of licensing emerging is that when software

licensing was first introduced, the software development firms assumed that most

businesses would use the software for a 8 to 10 hour period. Yet, did not take into

consideration that with the advancement of technology, more businesses would want a

Afloating@ license across the world for 24 hours – thus it was not cost effective for

the software development firm. A floating license is a license that is made available

to anyone on a network. The licenses are not Alocked@ to particular workstations,

instead they Afloat@ to modes on the network.

Shareware, freeware and public domain are different type of software available

to the end user, and are distinguished by different rules about how programs may be

distributed, copied, used and modified. The term Ashareware@ refers to software that

is distributed at a low cost, but which requires usually a payment after a certain time

period and registration for full use. Copies of this software are offered on a trial

basis, the end user is free to try a scaled down version of the program. If the end

user wants the shareware program, included in the program is information specifying how

to register the program and what fee is required. Once registered the end user will

typically receive a printed manual, an updated copy of the software (often with

additional features), and the legal right to use the program in their home or business.

The advantage that shareware has is that it lets the end user thoroughly test a program

to see if it=s useful before making a purchase. The authors of shareware programs

retain their copyright on the contents, and as other copyrighted software should not be


Freeware is also distributed at a very low cost and like shareware is found

mainly on the Internet. The authors of the freeware program do not expect payment for

their software. Typically, freeware programs are small utilities or incomplete programs

that are released by authors for the potential benefit to others, but the drawback to

this is that there is no technical support. Public domain software is generally found

on the Internet and is released without any condition upon its use. It may be copied,

modified and distributed as the end user wishes to do.

A license manager is a system utility-like application that controls or monitors

the use of another end-user application. It is generally implemented to protect

intellectual property (meaning to stop illegal copying) and/or to become more

competitive by offering new ways in which to evaluate, purchase and pay for software.

Since the license manager controls the number of application users, there is not a need

to control the number of application copies. This process lets the end user run one or

more applications between machines, without violating the terms of the license


SPA has created a program that companies can use to help discover and correct

problems before they result in legal actions, fines and also negative publicity. The

eight point program is as follows:

1. Appoint a software manager to implement and monitor all aspects of company

software policy.

2. Implement a software codes of ethics for everyone to adhere to. The ethics

should state that copyrighted software, except for backup and archival purposes,

is a violation of the law.

3. Establish a procedure for acquiring and registering software. Determine your

companies software needs, evaluate software packages, and also have supervisors

approve the plans. Keep the lines of communication open.

4. Establish and maintain a software log. The log should state the date of when

the software was acquired, the registration of it, serial number, network

version, location of where the software is in use, where the original is,

licensing agreement and the location of the original disks.

5. Conduct periodic audits or on a as needed basis comparing the software log

and/or other purchase records.

6. Establish a program to educate and train your employees about every aspect of

software and its uses.

7. Maintain a library of software licenses and provide users with copies of the


8. Having done the above seven points, the company can benefit by having obtained

software legally, receive full documentation, technical support when needed and

also upgrade notices.

Patents do not cover specific systems, instead they cover particular techniques

that can be used to build systems or particular features that systems can offer. Patent

grants the inventor a 17 year monopoly on its use. Once a technique or feature is

patented, it may not be used in a system without the permission of the patent-holder –

even if it is implemented in a different way. Since a computer program usually uses

several techniques and provides many features, it can infringe many patents at once. A

computer program is built out of ideal mathematical objects whose behavior is defined,

not modeled approximately, by abstract rules. An example of this is Borland

International, Inc. complained in the 1st Federal District Court gave Lotus Development

Corp. the benefit of patent protection to Lotus 1-2-3 menu commands and their order, but

failed to require Lotus to meet the requirements of patent law, including novelty,

examination and contribution to the prior art. The Supreme Court sided with the 1st

Circuit decision that one entity cannot own the user interface to programs. Meaning

such as file formats, menu structures and programming languages.

Software license agreements emerged as the most popular means of protection of

proprietary rights in computer software. They coexist with other forms of intellectual

property rights as patent and copyright. Software license agreements serve several

functions in transactions involving the transfer of computer technology. One of the

most important legal functions is the protection of the proprietary rights of the

licenser in the transferred software. Other functions include controlling the revenue

generated by licensed software and determining the rights and responsibilities of the

parties regarding the performance of the licensed technology. Issue related to these

functions include the applicability of Article 2 of the Uniform Commercial Code,

including offer and disclaimer of warranties, determining the appropriate types of

licenses to utilize, such as single users/CPU licenses, Site/enterprise licenses and

network/concurrent licenses

Trade secret, copyright and patent law are Astatic@ forms of protection in the

sense that they may exist independently of any underlying business transactions and do

not necessarily require any transfer of intellectual property from one party to another.

Whereas, the need for a license agreement usually arises as one of the contractual

forms of protection when the underlying business transaction involves the transfer of

intellectual property, such as computer software. Transactions involving the transfer

of computer software are subject to both federal and state laws. Generally, state law

governs contractual and trade secrets aspects of the transaction, while federal law

governs aspects related to patent, copyright and antitrust issues.

Each state has its own version of a doctrine of a trade secret, the common

thread through these state-specific laws is that if you show that you are seriously

treated information as confidential and that the confidential information helped your

competitive position, you can stop others from using it if the information was

improperly acquired by them, and even collect damages from the wrongdoers.

A computer is useless without software. The two types of software typically

found on a computer are operating systems software and application software. Operating

system software Aprovides@ interface@ that makes it easier to develop programs for the

system by reducing the amount of code that must be written. The operating system acts

as an interface between the computer hardware, application programs and the end user.

Application software consists of one or more computer program that fulfill a specific

function for the user like word processing, bookkeeping or financial analysis.

Two legal cases recently within the last few years has brought to light the

controversy regarding the copyright protection of software elements. Until 1992, most

of the federal courts followed the decision in Whenlan v Jaslow Dental Laboratory as a

precedent of similar cases. Whenlan, a small software company wrote a accounting

program for Jaslow Dental Laboratory company. Jaslow rewrote the software to run on

personal computers and proceeded to sell the product. The software was identical to

Whenlans in the data structures, logic, and the program structure, except for the

source code. Jaslow argued that the duplicated elements were part by the of the idea –

not the expression. The court in response felt that the data structures, logic, and

the program structure comprised to make a single function of a computer program,

therefore copyright protection should be given to those elements also.

In 1992, this protection was weakened by Computer Associates v. Altai, Inc. ,

when Altai a software developer was accused of copying various modules of a software

package developed by Computer Associates which controlled the running of applications on

IBM mainframes. The court rejected Whelan=s premise that a computer program embodies

one function because programs are made up of sub-routines that contain their own idea.

The court recognized this would narrow the scope of software copyright protection and

found this in accordance with Congressional intent of computer programs with copyright.

This resulted in why currently software copyright is not as broad as it once was.


Brandel, William, "Licensing stymies users,"

URL:"", Viman Software, Inc.,


Business Software Alliance, "Software Piracy and the Law,"

URL:"", Business Software Alliance,


Software Publishers Association, "SPA Anti-Piracy Backgrounder,"

URL:"", Software Publishers Association,


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