Pirates On The Pcs -- Illegal Copying Of Software Programs Costing Companies Billions

It has been estimated that for every copy of a software program that's been purchased, an illegally duplicated version exists in someone's personal computer. The practice, called software piracy, takes a staggering $2 billion to $3 billion bite out of the industry's annual ledger.

For smaller companies, such as O'Hanlon Computer Systems in Bellevue, software piracy can spell the difference between profitability and near-extinction. Bigger corporations such as Microsoft and Cambridge, Mass.-based Lotus are better able to absorb the losses but nevertheless feel victimized at the bottom line.

Still, software piracy has been largely tolerated, somewhat in the way as illegal photocopying or videotape duplication.

Now that's changing: Led by the Software Publishers Association and the Business Software Alliance, leading trade groups based in Washington, D.C., the industry has embarked on a legal and public-awareness campaign against illegal copying, as it is done both internationally and domestically.

Piracy takes numerous forms, ranging from outright ``cloning'' of a program and selling it as a legitimate package, to ``softlifting'' - making extra copies and distributing them among employees or swapping with friends.

In Hong Kong, illegal imitations of popular programs proliferate in the same way as ``rip-off'' versions of Rolex watches and Gucci handbags. Although the programs sell for less than their American equivalents, packaging often is similar and the actual software itself identical to the ``name'' version.

Counterfeiting domestically is less widespread, although Microsoft two years ago sued several companies associated with a California scheme to sell counterfeit copies of its DOS operating system. Court documents in the suit showed the packaging almost identical to the legitimate version (again, the software was identical, merely duplicated copies of the original program).

More often, however, piracy consists of ``disk loading,'' where a PC's built-in hard drive is stocked by a computer dealer with copied software and sold with the machine, usually as an incentive to buy from the particular dealer. No separate fee usually is charged for the software, but the PC buyer also does not get original diskettes or documentation (manuals, etc.) for the programs. And users also can be ``burned'' by a dealer charging for putting DOS on a system but not providing the original diskette or manual.

Informal disk-swapping among friends and associates also is considered piracy, although no money exchanges hands. The same holds true for commercial software placed on electronic bulletin-board systems, a practice rigorously monitored by most operators of the boards.

In any case, piracy is prohibited by federal law, which states that ``it is illegal to make or distribute copies of copyrighted material without authorization.'' Penalties can include fines as much as $50,000 and jail terms of as many as five years.

The biggest case-to-date brought by the Software Publishers Association involved Facts on File, a New York book publisher which acknowledged using illegal copies of software produced by Microsoft, Lotus, WordPerfect and Ashton-Tate (which markets industry-standard dBase programs), the PC industry's top-four producers.

A court settlement between the association and Facts on File last summer was kept secret but involved an award in excess of $100,000. The association has also brought suit against a technical school, a software-rental firm and several PC retailers for selling computers with illegal software on hard disks.

Locally, O'Hanlon was forced to go to court against a New Jersey company, Corporate Technology, Inc., to recover an estimated $100,000 worth of illegally resold copies of their data-base language, which is used to create custom programs to manage client lists, personnel files and corporate records and other data. In all, O'Hanlon feels that between $250,000 and $500,000 worth of its software may have been in use illegally.

``We're looking at tracking down a whole slew of companies for piracy,'' said Gene Brown, O'Hanlon's public-relations director. In a lot of cases, he said, Corporate Technology Inc. didn't even change the opening screen, which contains O'Hanlon's logo, when they sold the program to customers.

O'Hanlon began its legal action more than a year ago, based on a tip from an employee of a company which had installed a pirated copy of the O'Hanlon Database Solution Language program. Although Corporate Technology admitted responsibility and agreed to pay reparations, O'Hanlon was unable to collect - partly because O'Hanlon itself was undergoing financial difficulties that led to its filing for bankruptcy.

``The piracy didn't cause the bankruptcy, but it certainly contributed to the continuing decline of the company's financial stature,'' Brown said. However, O'Hanlon was purchased and revived a year ago by Technology Capital Partners Inc. and today is aggressively pursuing the corporate market.

``Our message is simple: If you don't own it, you can't sell it,'' Brown said. O'Hanlon last month obtained a restraining order against Corporate Technology pending full trial of its complaint.

Data-base language systems such as that sold by O'Hanlon are vulnerable to piracy because they can be easily customized to fit a particular market or client base, in which case the origin of the program becomes less obvious. But even when the program is easily identified, such as Microsoft Word or Lotus 1-2-3, piracy can be difficult to trace in a corporate setting with scores or hundreds of users.

Copyright law requires that corporations purchase either a site license, in which case the program can be distributed among a given number of employees or divisions, or buy one copy per installed PC. With programs easily duplicated, however, it can become difficult to determine which copy belongs with a given computer.

For a time in the early 1980s, software developers resorted to a strategy called copy-protection, which prevented users from duplicating program diskettes. But the public hated copy-protection, which required bothersome floppy-disk insertion each time a program was used, and the practice was largely stopped. (Some games still contain a form of copy-protection.)

Although the Software Association has filed more than 30 lawsuits, not all piracy cases end up in court. Even among those that do, the association has yet to bring a case to trial, preferring mutually acceptable settlements instead. Because legal action is time-consuming and culpability difficult to prove in corporate settings, the association has set up a company-audit procedure ``for instances where we don't think litigation is warranted,'' said Jodi Pollock, public-relations director.

The association sends to the company a trained auditor who works with the company's information-systems manager. Printouts are made of each computer's hard-disk contents, then compared with serial numbers of licensed software.

A recent audit of a corporation with 146 PCs turned up illegal software on all 11 computers in the data-processing department, and on all but one computer in randomly chosen PCs throughout other departments. It also found software, including games, which employees had brought from home and placed on their computers.

``The boss wasn't too happy about the games,'' recalled Mary Jane Saunders, general counsel for the association. ``He said, `Hey, they're supposed to be working!' Of course, the employees explained that they only played games during lunch hour,'' she added with a chuckle.

Faced with the evidence, companies have proven more than willing to rectify the situation, Saunders said. The association requests that illegal software be erased from the computers' disks and replaced with properly purchased copies. A fine also is levied: The retail price times the number of unauthorized copies.

``Without exception, the companies we have dealt with have been up front and honest about wanting to pay for the software,'' Saunders related. ``They treat us more like consultants than adversaries.''

Not all illegally used software is intentionally pirated. Often, cases involve ``passive piracy,'' whereby an employee makes legitimate copies on his or her PC and leaves them there when moving to a different job or department.

And some software may belong to an employee. The association recommends that employees who might have brought their own legitimately purchased software from home be consulted before programs are erased, Saunders noted.

For companies which want to do their own internal audit, the association offers a self-audit kit. ``If you ask the average CEO or COO (chief operating officer), they understand the theory behind an audit but have no idea how to do one,'' Saunders said. An audit can take from a few hours to a day or more, she said, and varies depending on the size of the company and how well-organized its PC records are.

Fines are placed in the software association's copyright-protection fund, which is currently about $250,000. The fund is used for audits, to pay legal fees, publish public-awareness brochures and to sponsor ``Computer Chronicles,'' a public-television program, as well as to support an association piracy hotline, which receives 10 to 15 calls a day.

``There are a lot of disgruntled former employees out there,'' Saunders said, adding that whistle-blowers wary of internal repercussions also turn to the hotline.

Neither the association nor developers such as Microsoft are able to say whether piracy is on the decline or rise. But public-awareness campaigns and a growing understanding of copyright requirements have had an impact on the once-indiscriminate practice, they agreed.

``Some isolated forms of piracy are a growing problem,'' said Debra Vogt, a senior paralegal for Microsoft, referring to installation of the company's DOS operating system on hard drives sold in new computers. ``But otherwise, I don't think it's on the increase. There's good end-user awareness.''

Internationally, awareness is less sophisticated, partly because copyright law varies. ``In the U.S. the law is pretty clear and the penalties are stiff, but it's not that way overseas,'' said David Curtis, senior corporate attorney for Microsoft's international group who credits a recent Customs raid in Hong Kong with dampening the piracy market there. ``But more people are recognizing software as copyrightable work, and that's a good trend.''

Piracy foes credit operators of hobbyist computer bulletin-board systems for assisting in the battle. Although they once had a maverick reputation and fought copy-protection in the industry, most boards contain strict warnings against unauthorized software.

One phenomenon that may also counteract piracy is the growing problem of computer viruses, which can shut down or even damage software and disks. Viruses are found in free public-domain programs but almost never in commercially purchased software.

``If I were a corporate executive concerned about the security of my computer system, I would have real tight controls on the software,'' Saunders admonished.

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WHAT IS SOFTWARE PIRACY?

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Illegal handling of software programs takes the following forms:

- Counterfeiting: Duplication of packaging and diskettes sold as legitimate versions.

- Disk-loading: Placing DOS and other software on the hard disk of a personal computer, which is then sold with the computer. This is legal only if the original DOS and software manuals and registration diskettes are sold to the customer as well.

- `Softlifting': Distributing copies of legally purchased software to employees or friends, or placing copies on their hard disks. This applies to corporations as well as individuals.

- Transferring commercial software via electronic bulletin-board systems: This is similar to disk-swapping, only done remotely by telephone-line connections.

- Placing DOS software on other software program diskettes: This is done to avoid the need for DOS on a diskette or hard disk, but is legal only if the copied DOS is owned by users of the programs.

- What's permissible: It is legal to sell legitimately purchased software in classified ads, etc. It is also legal to sell a personal computer with legitimately purchased software loaded on its hard disk. In both cases, however, no copies of the programs being sold may be retained by the seller.

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REPORTING PIRACY

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The Washington, D.C.-based Software Publishers Association, a trade group representing more than 500 developers of business, consumer and educational programs, offers a toll-free hotline to report instances of software piracy: 1-800-388-PIR8.

The association also offers a free publication, ``Software Use and the Law,'' to those sending a self-addressed, stamped envelope to 1101 Connecticut Avenue N.W., Suite 901, Washington, D.C. 20036. A free self-audit kit for corporations may be ordered from the association at the same address.