Economic Consequences of Software Piracy

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HarryG

Dec 28, 2004

Economic Consequences of Software Piracy

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Economic Consequences of Software Crime

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. 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