Is your IP house in order?

When I read Mike Cohen’s recent blog about IP audits, it reminded me that it’s been a while since I have had a client undergoing an audit by the Business Software Alliance (BSA).  The BSA is a nonprofit self-funded association of companies that, among other things, engages in the private enforcement of its members’ intellectual property rights through the audit of businesses for compliance with their software licenses. I appreciate the business benefit such an organization offers to its members, as well as the public benefit from the organization’s policies promoting the protection of intellectual property and encouragement of innovation.

Nevertheless, I can’t help but be grateful when my clients are not the target of a BSA audit. If selected for an audit, chances are pretty high that you will be out of compliance. But what may constitute noncompliance—and the cost of resolving such noncompliance—can be surprising.

It isn’t enough to be generally well-managed and not intentionally dishonest. You must have proof of purchase documentation for every piece of software in use (not just evidence such as the original disks or even an invoice, but a receipt or packing slip). How many companies keep that documentation? If you purchase hardware with preloaded software, is the software itemized on the documentation proving your purchase of the hardware? Is the company that is using the software also the company named in the purchase documents? Do the names on the invoice and license match exactly? These are only some of the issues that can create an appearance of significant noncompliance. They have nothing to do with intentional wrongdoing or even careless disregard for the intellectual property rights.

Proposed penalties for unlicensed software use (identified by the BSA as any products in use without adequate proof of purchase dated prior to receipt of a BSA audit letter) are calculated using a formula based on a multiple of the full retail license fee of the software at its unbundled rate. While the final settlement amount is open to negotiation, the BSA will assess an amount for its attorneys’ fees, and may require an additional fee for settlement confidentiality. Final agreements typically require the deletion of all unlicensed software and a commitment to implement procedures for future compliance. Unless a company determines to discontinue all use of a particular software product, the settlement may include an agreement for the license of additional software required for full compliance.

Some audit targets are selected randomly, but most these days probably result from a report by an informant, typically a disgruntled current or former employee. Under the BSA’s reward program, informants are paid for such information based on the amount of the settlement the BSA ultimately receives from a noncompliant organization. A potential reward can be as high as a million dollars if the settlement exceeds fifteen million. Most settlements are under $100,000, but the BSA reported eight in the first half of 2012 that ran between $120,000 and $625,000. 

The activity reported by the BSA suggests that the BSA is as aggressive as ever in pursuing the enforcement of software licensing rights, so if you haven’t already received a BSA letter, take advantage of the opportunity to clean up your records now. If you are already in the midst of an audit, there are still things you can do to enhance your settlement options.