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Compliance stormtroopers at the gates

Small businesses beware: the Business Software Alliance may be stalking

Back in the prehistoric days of 1997, when Windows 95 users roamed the earth, few knew much about illegal software usage. Certainly not the folks at CeraMem Corp., a Waltham, Mass.-based environmental-research firm. At this quiet workplace, where software engineers and environmental scientists mixed quietly, the closest thing to a ruckus was when colleagues would mutter over yet another Red Sox loss to the Yankees.

One June morning, all of that changed in a hurry. While company President Robert L. Goldsmith looked on in shock, U.S. marshals, accompanied by investigators from the Business Software Alliance (BSA), a Washington, D.C.-based nonprofit software copyright infringement prevention group, burst through the doors and began confiscating computer software records, elbowing CeraMem workers off their desktops in the process.

Tipped off by a disgruntled employee, the investigators found copies of unlicensed software from Microsoft, Autodesk, and other vendors. Citing a potential million-dollar liability, CeraMem quickly settled with the BSA for a $48,000 fine.

Almost five years later, Goldsmith still doesn’t want to talk about it. “We’ve put that episode behind us,” he says. But at the time, Goldsmith told Business Week that the BSA “marched in here like storm troopers” in raiding his firm. With no information technology manager as such, Goldsmith said that he had no idea his firm was using unlicensed software.

If it’s any consolation to Goldsmith, he’s hardly alone.

In December 2000, the Calgary Royal Canadian Mounted Police seized more than $167,000 in counterfeit software from the residence of Dean Wolf of Muckabout.com. Wolf allegedly was selling illegal Microsoft software on his Muckabout.com Web site, and he advertised on Amazon, eBay, and Yahoo! Wolf has been charged with offenses under section 42 of the Copyright Act.

In May 2001, Hong Kong’s Independent Commission Against Corruption (ICAC) raided the offices of the Optical Disk Manufacturers Association and seized more than two dozen counterfeit Microsoft “stampers” (used to produce software CDs), valued at approximately $50 million. The raid also resulted in the arrest of five individuals. In an unrelated action, ICAC officials arrested an individual associated with sales of counterfeit software over the Internet.

On May 11, 2001, a federal jury in Chicago returned a guilty verdict in the first trial under the No Electronic Theft Act, a 1997 law enacted to combat Internet intellectual-property (IP) offenses. The defendant, 28-year-old Christian Morley of Salem, Mass., was found guilty of conspiracy to infringe software copyrights for his role in the notorious underground group Pirates with Attitudes. Thirteen of Morley’s co-defendants had already entered guilty pleas. Under U.S. statutes, conspiracy to infringe a copyright carries a maximum penalty of five years in prison and a $250,000 fine. Restitution is mandatory.

December saw a federal investigation, Operation Buccaneer, considered to be the largest ever conducted against so-called software pirates. Customs officials believe the series of raids successfully shut down DrinkorDie, an international software-copying ring.

And that’s just the latest news.

According to the BSA, software IP offenses in 2000 cost the United States $2.6 billion in retail sales of business software applications and 118,000 jobs. The average infraction rate in 2000 was 24 percent of all software in use in the United States. That’s a drop in the bucket in Southeast Asia, where the joke is “one country, one disk.” Unlicensed software rates in China, for example, have been measured as high as 98 percent in 2000, according to the organization.

Part of the problem is systemic. Most businesses don’t have rigid software accounting practices. Not helping matters is the feeling that employees couldn’t care less if their software was legitimate or not. According to a recent study by London-based ICM Research on behalf of the BSA, more than half of employees believe that using unlicensed software on their PCs is one of the least risky activities they could do at work.

Whatever the reason, the BSA and its advocates say software vendors are getting soaked, and that the ripple effect impacts everybody. “We’ve pegged the losses to the software industry at about $12 billion worldwide,” says Jenny Blank, director of enforcement at BSA. “Not only is one industry affected, but when income taxes are not paid from unlicensed software and jobs are lost because the companies impacted don’t have enough money for research and development, we all pay a price.”

There’s also little argument that the BSA has been effective for its corporate parents, which include Microsoft, Apple, Autodesk, and many other software vendors. During the past 10 years, the alliance has collected more than $66 million in penalties from companies caught with unlicensed software.

Pushy, pushy

While it’s tough to argue with those numbers, critics are piling on the BSA for what they consider to be the organization’s heavy-handed tactics when dealing with companies.

Aside from the raids with U.S. marshals, the BSA has been known to warn managing directors that “pirated” software use at their companies places them at risk of prison sentences of up to two years. In addition, companies that claim they have purchased the software but can’t find receipts are herded toward the gallows along with the big-time counterfeiters and software scam artists.

“I honestly think everything they fined us for was software we had purchased properly… we just couldn’t document that we had all the licenses,” says one Internet chat room participant who owns a small medical software company. “They didn’t care, because they knew we were too small to fight back. I think all they really wanted was to reach a settlement so they could get a story about us in the local newspapers.”

The BSA’s perceived aggressiveness at self-promotion is a recurring theme for its critics. Costa Mesa, Calif.-based Tickets.com, an online ticket provider, recently ponied up $473,000 in fines after complying with a request by the BSA to audit its computer software inventory. During the 1990s the company had acquired 11 companies. According to company spokesperson Randall Oliver, Tickets.com had good reason to think all of its software was purchased legally, though it couldn’t produce all the documentation that backed that up. “We’ve fully complied with what any company would do in order to be a good corporate citizen,” offers Oliver. “It really bothers us that they put out a press release that, in essence, brands us and the others as ‘pirates,’ when there was no attempt to have illegal copies of software. In our opinion, it’s a case of overzealous publicity, and we think it is counterproductive.”

The BSA says that criticism is to be expected when you’re trying to right a wrong and that they’d prefer they didn’t have to get involved at all. “We don’t contact these companies on a whim,” notes Felicia Boyd, a litigation partner for the Minneapolis law firm Faegre & Benson, which handles a good chunk of the BSA’s legal work. “Typically, some informant has to call us and we have to check their story out. It’s unfair that people should pay for software when others don’t.”

Even the BSA will admit that most illegal software acts in the United States are more innocent than the term “piracy” (which dots most BSA press releases) implies. Infractions often occur when an employee copies software from work to use while working at home; when a company bypasses a site license it owns and copies software to all its computers out of convenience; or when an unhappy employee takes a copy of his company’s software and launches it on the Web.

As Boyd says, companies that are targeted by the BSA are almost always turned in by disgruntled ex-employees, who drop a dime on the BSA’s tip line and sit back and wait for the fireworks to start. The BSA is also quick to point out that outright raids on company premises are the exception rather than the rule, accounting for only 10 percent of total actions against companies using unlicensed software.

“When we do raid a company, we first have to go in front of a federal judge and demonstrate credible evidence that something is up,” adds Boyd. “People don’t realize that many software abusers can delete unlicensed software with the click of a button. A raid can forestall that.”

The BSA’s Blank agrees, adding that the severity of the unlicensed software problem determines the response from vendors. “Aggressive? You have to look at the size of the problem,” she says. “I don’t think we are heavy-handed at all. Look at our truce program–we try to do that in a non-enforcement way. We go region to region and alert people that they might have a problem. We’re not looking to strong-arm anybody.”

Hidden agenda?

Then there’s the Microsoft issue.

Some critics say that Microsoft goes after potential software-swipers with exceptional zeal. That’s fine on its own, some say, as anyone is entitled to protect their investment.

But after a company is issued a warning, should Microsoft follow up with a series of sales calls designed to push more software on a firm that hasn’t been found guilty of illegal software practices yet?

Here’s the beef from targeted companies: Under the BSA’s “truce” campaigns, where companies can turn themselves in without threat of legal ramifications (though they do pay a stiff fine in most cases), unlicensed-software users have 30 days to discard the illegally copied software and reach a cash settlement. Some say that Microsoft is double-teaming companies contacted by the BSA and are given a heavy sales pitch for “legitimate” software products. To companies under the BSA’s microscope, such calls may be perceived as a threat to buy or else.

“I can speak from first-hand knowledge of the BSA’s and Microsoft’s practices,” says an anonymous denizen of a Web chat room devoted to Microsoft. “About 3 months ago I was contacted by Microsoft’s local law firm. They asked us to perform a ‘voluntary’ internal audit of our MS licenses. A week or so later I received a call from the law firm stating that I could do it myself or they [the BSA] could come in a do it for me. I naturally agreed to do it internally and committed to having it done within a month. A short time later, I started receiving calls from various sales reps at Microsoft announcing deals/discounts for their products … hmmm … coincidental?”

Not helping matters is Microsoft’s own ham-handed efforts to go after software copiers. In the Netherlands, Microsoft recently sent inquiry letters to more than 20,000 companies that weren’t even customers. Company execs concluded that the targeted companies, which owned 10 or more computers each, must have been using illegally copied software.

At Microsoft, as usual, the end justifies the means. Since August 2000, the company’s antipiracy efforts have knocked five million illegal copies of its software off the streets, resulting in $17.7 million in settlement and judgements worldwide.

“Microsoft has its own antipiracy campaign,” offers the BSA’s Boyd. “And it has no input on what the BSA does.”

Not going away

Devices that can write CD-ROMs are inexpensive and easy to use. While some companies are taking stronger steps of their own (example: with Microsoft’s Office XP and Windows XP software, customers have to plug in serial numbers to activate the program. If they haven’t after three days, the software won’t work), the BSA says it’s it not going to back off.

“Piracy rates have decreased in a number of companies in a number of countries in recent years,” says the BSA’s Blank. “And more firms are much more aware of the problem. While we have had success in raising awareness in people who aren’t managing their software appropriately, we still have a long way to go.”

Tips from the BSA

The BSA encourages businesses and consumers to take the following steps to ensure legal use of software:

Look out for prices that are too good to be true. Adopt a corporate policy on compliance with copyright laws. Audit company computers. Document software purchases and understand licensing agreements. Educate management and employees of their obligations under copyright laws. Be wary of software products that come without any documentation or manuals. Beware of products that do not look genuine, such as those with hand-written labels. Watch out for products labeled as academic, OEM, NFR, or CDR. Beware of sellers offering to make back-up copies. Be wary of compilations of software titles from different publishers on a single disk. Check with organizations such as the BSA should you become a victim of software fraud.

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