Notes & Comment
Vol. 2006, No. 2
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Copyright
Licensee Beware: Heed Those Software License Limitations!
As with many contract relationships, software licensing is based on the honor system. Parties negotiate license terms and conditions, including price and use limitations, and the licensor depends upon the licensee's good faith compliance with their delicate bargain. So it's not exactly a newsflash when such relationships fracture over a licensee's expansive view of what their bargain permits. Such was the case in the Ninth Circuit's recent decision Wall Data Incorporated v. Los Angeles County Sheriff's Department (U.S. Court of Appeals for the Ninth Circuit, No. 03-56559 (May 17, 2006)).
Background
Between 1996 and 1999, the Los Angeles County Sheriff's Department purchased a total of 3,663 licenses to two versions of Wall Data's RUMBA emulation software product for use in a new correctional facility being built by the county. The facts of the case do not discuss the type of software licenses the Sheriff's Department purchased, and the court studiously avoids relevant software license terminology or nomenclature to describe them.
For example, "node lock" licenses typically limit use to specifically identified computers or servers (e.g., 100 licenses linked to 100 designated computers), whereas "floating" or "seat" licenses often permit unlimited installation but authorize a maximum number of concurrent users (e.g., 500 installed copies, but only 100 licensed users ("seats") at any one time). Here the Sheriff's Department apparently purchased "node lock" licenses (usage tied to designated computers), not "floating" or "seat" licenses (unlimited installation with usage on a limited number of computers at any one time), but they didn't appreciate -- or acknowledge -- the difference between these two types of license.
Due to delays and personnel constraints loading the RUMBA software one copy at a time onto desktop computers at the new facility, the Sheriff's Department automatically installed the software onto 6,007 computers using a technique described as "hard disk imaging". However, apparently thinking they had a "floating" license for 3,663 computers at the site, the Sheriff's Department installed internal control mechanisms that limited concurrent use of the RUMBA software to 3,663 computers there. In short, they purchased 3,663 RUMBA licenses that were to be used only with designated computers, installed 6,007 copies of the software on computers at the site generally, and thereafter limited use of the software to only 3,663 of those computers at any one time.
Wall Data claimed this was a copyright infringement, and it sued the Sheriff's Department in federal district court in Los Angeles. The primary claim was that hard disk imaging of 6,007 copies of the RUMBA software was an "over-installation" not authorized by the license agreement; that only 3,663 copies could be installed on an equal number of computers at the site. The Sheriff's Department argued, among other things, that what they'd done was "fair use"; they'd not violated the license agreement and had configured the software so that concurrent use was limited to the number of "copies" they'd purchased. In pre-trial rulings, the district court rejected the Sheriff's Department's fair use defense and, after a jury verdict of copyright infringement, the Sheriff's Department was ordered to pay $210,000 in damages and nearly $600,000 in attorneys' fees and costs. The Ninth Circuit affirmed the district court's pre-trial ruling barring use of the fair use defense.
Numerical Restrictions in Software Licenses Matter
Wall Data Incorporated v. Los Angeles County Sheriff's Department was mostly a fair use case: the Sheriff's Department had infringed the RUMBA software copyrights by "over-installing" more copies than the number of licenses they'd purchased. But was that over-installation protected fair use? The Ninth Circuit held it was not fair use.
Several principles follow from Wall Data that are perhaps useful to software licensors and licensees alike. First, in addition to constituting a breach of contract, violations of numerical software license restrictions and other limitations can amount to a statutory claim of copyright infringement. Misunderstanding the type of "mass installation" site license purchased (such as "floating" vs. "node lock") can have severe legal consequences when software is incorrectly deployed. Purchasing a license is not necessarily the same as purchasing the right to make a copy of the licensed software; the Copyright Act does not necessarily permit one who has purchased 3,663 licenses to make 6,007 copies even if only 3,663 copies are used at a given time. Technical efficiencies employed to better use licensed software will not excuse unlicensed use of the software.
The main violation in Wall Data was overuse of the software; installation of excess copies beyond what the license authorized, by means of hard drive imaging. As the Court wrote, "[W]henever a user puts copyrighted software to uses beyond the uses it bargained for, it affects the legitimate market for the product. Thus, although hard drive imaging might be an efficient and effective way to install computer software, we conclude that "unrestricted and widespread conduct of the sort engaged in by the defendant" would nonetheless lead to over-use of the software. (Citations omitted.)"
Summary and Conclusion
It makes no matter if license limitations and restrictions are negotiated, or are included in pre-packaged license formats. In Wall Data, the license terms were found in standard "shrink-wrap" and "click-through" license formats, and the Ninth Circuit had no trouble affirming the trial court's enforcement of such license formats. More importantly, the case advises "mass deployment" site licensees (like the Los Angeles County Sheriff's Department) to better understand license types, applicable numerical restrictions, and other limitations in their software license terms. For their part, licensors having a pricing model in which license types, numerical restrictions or other limitations matter are advised to impose clear restrictions and limitations in license wording or risk unaccountable usage, and to make certain that the applicable license type ("floating" vs. "node lock", for example) is defined and made part of the license grant.
© Matthew Joseph 2006. Law Offices of Matthew Joseph, San Mateo, California, practices in the areas of intellectual property licensing, commercial real estate leasing, and corporate and business transactions. No legal advice is intended by the information provided herein and recipients should independently consult counsel before taking any action related to this subject matter.