Economic Consequences Of Software Crime Essay

In 1996 worldwide illegal copying of domestic and international software cost
$15.2 billion to the software industry, with a loss of $5.1 billion in the
North America alone. Some sources put the total up-to-date losses, due to
software crime, as high as $4.7 trillion. On the next page is a regional
breakdown of software piracy losses for 1994. Estimates show that over 40
percent of North American software company revenues are generated overseas,
yet nearly 85 percent of the software industry’s piracy losses occurred outside
of North America.The Software Publishers Association (SPA) indicated that
approximately 35 percent of the business software in the North America was
obtained illegally. In fact, 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 s!
oftware 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 to 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, which are subject to
Constitutional 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
provincial law, and most jurisdictions have laws that criminalize the
violations of a trade-secret holder’s rights. The definition of a trade secret
varies somewhat from province to province, but commonly have the same elements.

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For example, the information must be secret, not 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 if the holder takes adequate precautions to protect the secret.

In 1964, the National 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 doubt.

In 1974, the government 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. 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. It now 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 National Copyright Office for the program to be
protected as copyrighted. With that in mind a copyright is a property right
only. In order to prevent anyone from selling your software programs, you must
ask a (federal) court 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 was approved in 1990. This Act prohibits
the commercial rental, leasing or lending of software without the express
written permission of the copyright holder.Another amendment to the
Copyright Act was passed in 1992. This amendment 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.

According to federal 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. 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 softwar!
e 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 more expensive.

Federal appellate courts have determined that operating systems, object code
and software contained in ROMs are protected by copyright. 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 has created major problems for the widespread
development of multimedia applications with regards to 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 as well. 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 written an 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 an 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.

The 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 their hard disks. The program
searches the PC’s hard disk 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, provides an Internal Controls
Analysis and Questionnaire. The guide also contains all of the SPA’s current
anti-piracy materials.

The 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 the amount is 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 in our daily lives than it ever has.

Such as embedded software, which is critical to equipment in such 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 software 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, all of these have high administrative costs in regards to
software programs. Software licensing policies were originally a result of
software developer’s 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 software licensing. The
following factors are taken into consideration when determining a cost for a
software 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 network license. There are four types of categories that are classified as a
network license. Concurrent use licenses authorize 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 currency-based license. This type of license works on
the basis that it provides to the end user a specified dollar amount of
software licenses. This allows licenses to cover different business
application software, so long as the total value in use at a given time is
less than the amount stipulated in the license.Another type of license
emerging is known as a platform-independent licensing. Which 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
shrink-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 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 floating license across the world for 24 hours. This made it so 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
locked to particular workstations, instead they float to modes on the network.

Shareware, freeware and public domain are different types 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 shareware refers to
software that is distributed at a low cost, but which usually requires 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 pirated.

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 agreement.

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
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 an 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 agreement.

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 when Borland
International, Inc. complained that a federal court decision 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 decision that one entity cannot own the user
interface to programs. This would include such components 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. Issues 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 static 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 provincial laws. Generally, provincial law governs
contractual and trade secrets aspects of the transaction, while federal law
governs aspects related to patent, copyright and antitrust issues.

Each province has its own version of a trade secret, the common thread through
these province-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 provides an 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 programs 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 for 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 that this would
narrow the scope of software copyright protection and found this in accordance
with the Government’s intent of computer programs with copyright. This is why
currently software copyright is not as broad as it once was.

All the above mentioned licenses and anti-piracy precautions cost billions of
dollars each year, in both direct and opportunity costs. These costs are
shared by anybody that is involved with any aspect of the software industry.

As the future of approaches, more and more people are gaining experience with
technology. That experience doesn’t come without a price. That price is the
power to manipulate technology for personal gain which usually results in a
detriment ?typically financial?to others.

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,

Business Software Alliance, “Did You Know?,”
URL:””, Business Software
Alliance, 1997.

The Economist, “Slipping A Disk”
URL: “”, The Economist, 1994.

Business Software Alliance, “Software Piracy,”
URL: “”, Business Software Alliance,


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