Legal loophole set to cut supplier power

Despite a legal loophole which swings the balance of power to users, litigation over software licencing is still an unattractive...

Despite a legal loophole which swings the balance of power to users, litigation over software licencing is still an unattractive option both for suppliers and users, says Mark Lewis

A loophole has come to light in UK legislation that could bring to an end to some of the sharp practices suppliers are applying to software licensing.

Under the terms of the Copyright (Computer Programs) Regulation 1992, an amendment to 1988's Copyright, Design and Patents Act, once a copy of software is in circulation the copyright owner has no right to control any subsequent distribution or sale of the copy.

According to Dai Davis, of commercial law firm Nabarro Nathanson, the purpose behind the legislation was to allow, for example, a copy of Microsoft Word software to be sold on from one individual or company to another, once the first party had ceased to use that copy. Although the legislation envisaged non-bespoke software being transferred in this way, the legislation applies equally to bespoke software.

The regulation gives the copyright owner protection to prevent the computer program being copied. However, Davis says that "the right to control distribution of a copy of the computer program is limited to the first sale of that copy of the computer program. The owner may not prevent any transfer of that computer program, once the first user has stopped using it."

For example, if a company goes into liquidation or administration, the liquidator or receiver is entitled to sell that firm's software licences, along with all its other assets, to another company. In this situation, says Davis, stiffing is clearly outlawed.

It may also be possible, says Davis, for the new owners to increase the number of users accessing the software. They may not produce additional copies of all or part of the program. But there appears to be nothing in the regulation that says they cannot allow more terminals to access the software if it resides on a central server.

Davis says, "Since the owner of the copyright will not usually have a contract with the second user of the software, the owner will not then have any contractual right to limit the use to which the second company puts the software."

By extension, there is another, weaker argument that even if there is no transfer, the first company can increase its number of users without paying a licence charge. Essentially this is because the first company could transfer its licence to a second company which then would be free to increase the number of users.

Davis says there are no legal precedents for this loophole, but that he has already used it "as a commercial lever", to help both users and suppliers.

"No sensible supplier would want this legal argument to be tested in court", he says. "The precedent it would set if it went against them would be an extremely dangerous one. If they had any sense they would settle out of court".

On the other hand, the supplier has the recourse of bypassing a civil "commercial" case and threatening to initiate criminal proceedings for unlawful use of their software - which might well scare users off court action.

Moreover, a triumph in court would most likely prove to be a Pyrrhic victory.

"Users require the good will of the supplier for maintenance purposes," says Davis.

Making arbitration an attractive alternative to litigation

Eurim, the all-party, parliament-industry IT lobbying group is exploring ways to persuade the IT industry to agree more often to arbitration over licensing grievances, writes Julia Vowler.

Suing your software and services supplier can be so expensive, for both plaintiff and defendant, that taking the path of alternative disputes resolution is emerging as a faster, cheaper and less damaging alternative to litigation.

But while arbitration in principle seems a good idea, getting the IT industry to adopt it as the norm is not so easy. The meeting last week of the Eurim sub-group on disputes resolution, chaired by Robin Laidlaw, former head of IT at British Gas, identified what might be an acceptable and practical way forward.

Eurim is targeting the issue of professional indemnity. All software and services companies need to take out substantial professional indemnity insurance to safeguard them against claims that work done by their professional employees is faulty or has caused damage. And when software is business critical, when it doesn't work properly the entire operation and profitability of the business can be jeopardised. Bad software can put you out of business.

To cover against that risk, professional indemnity insurance places a considerable financial burden on a supplier company - insuring even 10 IT professionals in a company can cost in the region of £30,000 a year. Eurim is now exploring whether the insurance companies that provide this cover could be persuaded to reduce the cost of providing professional indemnity for software and IT service companies which formally commit to pursuing alternative disputes resolution rather than resorting to the courts.

Compared with going to arbitration, "It can cost a fortune to go to court," warns Geoff Petherick, chief executive of the UK Computer Measurement Group (UKCMG) and chair of the Eurim Fair Dealing in Software and Service Contracts working party.

The argument is that if insurers only have to cover the cost of arbitration, rather than multi-million pound court proceedings, they can afford to lower the cost of providing professional indemnity - hopefully an attractive incentive to the IT industry.

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