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How to calculate damages for use of unlicensed software

Out-Law News | 16 Feb 2006 | 11:19 am | 6 min. read

There was a 25% increase in the number of companies settling for unlicensed software use in the UK last year, according to the Business Software Alliance. But the sums paid go some way to showing how UK law provides little deterrent to such piracy.

The Business Software Alliance (BSA) figures were published on Monday. It opened 420 investigations in 2005 into UK businesses reported to be using software illegally, an increase of 24% on 2004. According to the BSA, the strength of the economy was a key contributor to the rise: as businesses enjoy rapid growth, managers often overlook their software licensing. It put 80% of the settlement cases down to negligence.

The largest settlement was for £31,000 and eight settlements exceeded £20,000. But these sums are not wildly different from what each company would have paid had it been properly licensed in the first place because copyright law does not set out to punish for simple infringement.

OUT-LAW spoke to Graham Arthur, a Senior Associate with law firm Covington & Burling, who acts as BSA's UK counsel and author of many threatening letters sent on behalf of BSA members like Microsoft and Adobe. And he hopes that legal reform will give his letters more bite.

He explained that when a copyright owner has had its rights infringed – such as the use of a computer program with no licence – the law seeks to put that copyright holder back in the position it would have been in had no infringement taken place. When the infringement is a matter for the police – selling illegal copies of Windows XP at the local market, for instance – significant fines and even imprisonment may follow.

But licence creep – such as 150 installations of Windows XP in a company that has bought the right to 25 – is a matter for the civil courts. Here, damages are available but they are generally pegged to the licence fee for the unlicensed copies. It is difficult to deter piracy if the unlicensed user only runs a risk of paying a sum that he should have paid sooner. So, at least for now, a bit of creativity is required when assessing the loss.

Other countries allow for punitive damages in intellectual property lawsuits – perhaps a licence fee in addition to a lump of cash that sends a strong warning to others. But in the UK it's harder. "The problem is that companies may refrain from buying a licence until they're caught – then pay for a licence and argue that because they've paid, there is no loss," said Arthur.

Additional damages and The Sun

Section 97(2) of the Copyright, Designs and Patents Act of 1988 offers some hope for creative industries: "The court may in an action for infringement of copyright having regard to all the circumstances, and in particular to – (a) the flagrancy of the infringement, and (b) any benefit accruing to the defendant by reason of the infringement, award such additional damages as the justice of the case may require."

It sounds like an opportunity for punitive damages and in a way it is; but there are few examples of its application in court. Arthur points to a rare example: The Sun newspaper ran a story under the headline: "DOUBLE KILLER POPS OUT FOR A MCDONALD'S – Outrage over jaunt for psycho". A picture of the convicted killer appeared next to the story. But the picture was originally taken for his medical records when he was detained at a hospital. It was used by The Sun without authorisation.

Nottinghamshire Healthcare NHS Trust sued for infringement. That bit of its case was easy. But since the NHS Trust would never have licensed the photograph for publication, arguably it suffered little or no loss. So it sought to rely on section 97(2) damages. Mr Justice Pumfrey considered these 'additional damages' at length.

Justice Pumfrey concluded: "…careless infringement sufficiently serious to amount to an attitude of 'couldn't care less' is in my judgment capable of aggravating infringement and of founding an award of damages under section 97(2)."

He awarded basic infringement damages of £450 – the sum he felt that a willing copyright owner would be paid for a picture of similar size, interest and prominence being used by The Sun. But he brought that figure up to £10,000 using the powers in section 97(2).

Applying The Sun ruling to software

Graham Arthur acknowledges that using software without a licence is quite different from using the content of medical records without authority. "You can't really say that the software publisher would never have granted a licence," he said. "And there's no case law on the application of 97(2) in software that helps either the BSA or the infringer."

Arthur referred to recent cases in Norway, France and Latvia where the courts have, in cases of unlicensed software use, applied similar domestic laws – and decided that the copyright owner is not entitled to additional damages. He reckons the reasoning is unfair and he hopes it would not be followed over here – especially as he sees the same “couldn't care less” attitude in many of BSA’s cases. The cases in France and Latvia are being appealed.

He gives an example of how the BSA makes a calculation of loss: "If you're using Photoshop 4.0 without a licence and you're caught, you are told to buy a licence. You can't buy a licence for version 4.0 today – you have to buy a licence for the current version. But that will mean that the user has used two versions, but paid only one licence fee. The loss in that case is the licence fee that should have been paid for version 4.0. If we ascertain that version 4.0 has been used for, say, two years without a licence, we'll also claim for lost interest on that licence.” That combination will cost more than buying version 7.0 legitimately – so there is some deterrent; but not much.

Then comes the claim for additional damages under section 97(2). Arthur does not express much confidence of success. "We know that we'll only get an award if the circumstances are appropriate. It's perceived to be a provision against bootleggers," he said.

If the defendant had been using Photoshop 7.0 for two years – i.e. a situation where there is no room to argue about upgrades – the BSA would claim some interest, but it wouldn't be much. It would just represent the advantage to the copyright owner if the licence had been bought two years earlier and invested. "That wouldn't be fair – there is no deterrent – so this is where we might seek to rely on 97(2), especially if the software had been cracked." What he describes is wilful infringement, not just licence creep.

A subscription model, rather than a perpetual licence, might provide a greater deterrent: two years' unlicensed use will become expensive and that figure is added to payments for ongoing use. But it is unrealistic to expect the entire software industry to suddenly make the shift to a subscription model. Instead, the BSA is looking for legislative reform.

"We are talking to the Government about getting a new provision in our copyright law that allows for a punitive award as part of a damages award," said Arthur. "The US has a remedy of statutory damages; Ireland has a very generous additional damages remedy. We want similar powers here."

He describes our courts as being "squeamish" and "confused" about section 97(2). Parliament needs to address that, he says.

What the creative industry hopes is not that it will profit from damages; rather, it wants a change in behaviour. Infringement is rife – but stringent penalties could deter it. The BSA claims that its aim is not to recover large sums in court actions, but to change behaviour. The risk of having to pay such sums can help, in the BSA’s view, change the “couldn't care less” attitude.

Arthur admits that the BSA settles all of its cases. He said: "The cost of going to court outweighs the amount at stake, even though liability is cut and dried. There is no advantage to either party in going all the way to court to argue about damages. A damages assessment is independent of the hearing on liability and a damages assessment rarely sets a precedent: each case turns on its own circumstances."

The BSA writes to infringers and sets out a sum and invites settlement. Court procedure demands that parties at least attempt to settle their claim. So Arthur's letter will claim for the licence fee, the interest and a figure under section 97(2) – although he confirms that "we'll be up-front in admitting that the case law on this part is not particularly helpful," he says. The uncertainty persuades the BSA to negotiate on this figure, rather than the concrete part of its claim.

The Department of Constitutional Affairs is expected to launch a consultation on damages later in the year. It forms part of the UK's implementation of the EU Enforcement Directive. While the UK is not obliged to change its 97(2) provision, the BSA and other creative industry bodies will answer that consultation, lobbying for reform.