United States: Avoid Overpaying For Software Settlements

Last Updated: January 24 2017
Article by Keli Johnson Swan

Most software audits initiated by the software publisher or a third party entity authorized to pursue copyright infringement claims on behalf of the software publishers, such as the BSA| The Software Alliance ("BSA") or the Software & Industry Information Association ("SIIA"), are resolved outside of a courtroom. Many of the settlements require payment of a monetary penalty as part of the resolution.

There are many factors that precede the negotiation stage and affect the total payment. Once a company decides to participate in the audit and submits audit results, the BSA or SIIA identify any gaps in software licensing, according to the auditing entity's rules. These gaps may range from a deficiency of licenses to acquiring the incorrect license for the software installed. Once the auditing entity determines the number of gaps, it calculates a total settlement based on the information presented.

An initial settlement demand typically sets the baseline for negotiations, and it is critical to ensure that the initial number is accurate before engaging in negotiations in order to avoid paying an artificially inflated settlement. There are several key factors to consider with regard to the settlement demand.

  • Actual versus Statutory Damages The Copyright Act, 17 U.S.C. 504, allows the owner of a copyright to determine how to calculate damages related to copyright infringement. The copyright owner may elect to obtain actual damages, which is the actual value of the software installed, multiplied times the instances of infringement (number of installations). This provision references willful copyright infringement, lending the BSA and SIIA to include trebled damages in their calculations. The total actual damages include the number of software installations multiplied by the MSRP values, then multiplied by three.

Alternatively, the BSA or SIIA may elect to assess statutory damages for the copyright infringement. 17 U.S.C. §504 (c). According to this provision, the court may award between $750 and $30,000 per work. For example, if the BSA or SIIA assessed a penalty for $5,000 for Microsoft Visio, the number of copies actually installed would not be multiplied by the actual damages penalty associated with that particular work. Even if a company had 15 installations of Microsoft Visio, if the penalty assigned to that work is $5,000, then $5,000 is the total penalty for that item.

  • Unbundled Pricing for Suites Regardless of whether the BSA or SIIA decide to assess statutory or actual damages, a penalty is assessed for each individual component of a software suite. The BSA and SIIA argue that each component are copyrighted separately, and therefore should be calculated separately.

However, that argument is not supportable, but litigation in New York against the SIIA and Adobe regarding this matter was settled before a court ruled on the unbundling issue. Adobe's End User License Agreement specifically prohibits unbundling the software (Section 4.5 of Adobe's End User License Agreement). Despite this clear treatment of Adobe software suites as a single product, the SIIA will assess a penalty for each individual component of Adobe Creative Suite.

  • Incorrect MSRP values Recently, a trend has emerged among some of the BSA and SIIA's attorneys to assess artificially inflated or incorrect MSRP values for the software that is installed. It is critical to carefully evaluate the settlement demand on a line by line basis to ensure that 1) the number of instances of software incurring a penalty are accurate, and 2) the actual MSRP value of the products is accurate.

Two of the most recurring mistakes I have seen include incorrect pricing for Microsoft suites, and incorrect server pricing. Microsoft Office changed its pricing for its components in 2016 and newer versions to $109.99 for most components. Often the BSA and SIIA continue to assess the older pricing (139.99) for these new instances.

Additionally, I frequently encounter Enterprise or Core pricing penalties for Microsoft Servers that should include Standard pricing.

It is not a concession for the BSA to agree to the accurate pricing for its settlement calculations. Generally speaking, I do not recommend engaging in negotiations until you agree on the initial demand and correct any pricing mistakes.

  • CALs The BSA sometimes includes penalties for a Client Access License (CAL), based on the total number of employees and the type of server installed. However, a CAL is not a software product that is installed on a network, and therefore cannot be included in a penalty for software infringement. Do not allow the BSA to include this penalty.

It is important to note that if CALs are required, part of the post-settlement remediation process will require these licenses to be purchased.

  • Confidentiality and attorney's fees The BSA and SIIA offer to include a confidentiality provision to keep the existence and terms of the settlement confidentiality for a premium. The fee for including this provision varies widely based on the company, number of instances of software infringement, and the counsel for the BSA or SIIA. Typically this provision must be requested as part of any counteroffer to the auditing entity and is included as part of the total settlement sum. Most companies choose to include this provision to avoid the bad press associated with resolving copyright infringement.

The SIIA and BSA also include a line item in the original settlement demand for their own attorney's fees. This number varies based on the length of time a matter has been pending and the specific legal issues involved. However, it is important to ensure that this number is not artificially inflated. For example, an assessment of $25,000 for the BSA or SIIA's attorney's fees is unnecessarily high.

These are just a few key considerations for resolving software copyright infringement disputes. It is strongly recommended that an audit target seeks legal counsel that specializes in software copyright infringement in order to avoid overpaying a settlement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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