BSA Audits

One of the most controversial tactics the BSA uses when calculating its settlement demands is its practice of unbundling software suites such as Microsoft Office and Adobe Creative Suite. Unbundling occurs when the target of a BSA audit is unable to provide acceptable proof of purchase for one or more installation of a software suite.

The effect of unbundling is to dramatically and artificially inflate the monetary component of a BSA settlement because the BSA calculates its fine based upon the MSRP of each component part of the software. In a BSA audit involving Microsoft Office for example, the BSA unbundles the suite by separating Microsoft Outlook, Microsoft Word, Microsoft Excel, Microsoft PowerPoint, and Microsoft Access and then calculates its proposed fine on the basis of the MSRP of each component. This practice results in a proposed fine per installation of approximately $2,000 for a product with a market price ranging from $150 to $350, depending on the version.

In my opinion, the BSA’s practice of unbundling is completely contrary to law because the software suites of BSA member publishers are compilations under the copyright law and therefore constitute a single work for purposes of calculating statutory damages for infringement. The U.S. Copyright Act 17 U.S.C. § 101(c) defines a compilation as follows:

“A "compilation" is a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship. The term "compilation" includes collective works.”

The statutory damages provision of the U.S. Copyright Act 17 U.S.C. § 504(c) provides in pertinent part that:

For the purposes of this subsection, all the parts of a compilation or derivative work constitute one work.

Federal court’s have also interpreted these provisions to preclude recovery of statutory damages for the component parts of a compilation. For example, in XOOM v. Imageline, the Court of Appeals for the Fourth Circuit only made one statutory damage award for each compilation of electronic clip art, even though each compilation included thousands of works because “[a]lthough parts of a compilation or derivative work may be ‘regarded as independent works for other purposes[,]’ for purposes of statutory damages, they constitute one work.” XOOM v. Imageline at 285, citing H.R. Rep. No. 94-1476, at 162 (1976).

Similarly, in WB Music Corp. v. RTV Communications Group, 445 F.3d 538 (2d Cir. 2006) the Court of Appeals for the Second Circuit interpreted 17 U.S.C. § 504(c) and discussed the distinction between compilations authorized by the copyright holder that constitute “one work” for statutory damages purposes and collections of separate works compiled by the defendant and never authorized by the copyright holder. Because the software suites implicated in BSA audits involve separately copyrighted works included in a compilation authorized by the copyright owners, section 504(c) applies and prohibits the award of statutory damages for the component parts of the suite.

One of the top ten questions asked by my clients is “How long does the BSA self-audit process take from start to finish?” Of course I give the standard lawyer answer: it depends. Here are the steps to a typical BSA audit.

Preparation of Audit Materials (3 to 6 months)

A BSA audit is a request, under threat of litigation, to compile a listing of all BSA member software products installed on the audited entity’s computer network as of the Audit Effective Date. The Audit Effective Date is the date on the BSA initial letter requesting an audit. The first step in preparing this information is conducting an automated inventory of the software products installed on all computers owned or leased by the target company. Once an accurate inventory of the BSA member software products is completed, the next step is to reconcile the software inventory information with proofs of purchase dated prior to the audit effective date. While there are various ways to prove ownership of a software license, typically an invoice is considered the best evidence of ownership in a BSA audit. In the typical case, the inventory and reconciliation process takes three to six months.

Secure a Confidentiality and Federal Rule of Evidence 408 Agreement (1 week)

With very limited exceptions, we advise the targets of BSA audits to cooperate with the self-audit process but to do so in a way that does not compromise their position in the event that an out of court settlement is not possible. We do not disclose any information to the BSA until it signs an agreement regarding the confidentiality of the information disclosed and specifically limiting the BSA’s ability to introduce the information as evidence in court. In the typical case, the BSA will sign our standard agreement within one week.

BSA Analyzes Self-Audit Materials and Makes a Settlement Demand (3 to 6 months)
After the self-audit materials are submitted by the target of a BSA audit, the Business Software Alliance typically takes three to six months to respond. The BSA’s response provides its interpretation of the self-audit materials and applies a formula for its initial settlement proposal. The BSA’s formula for calculating fines is generally three times the unbundled full retail price of the software products installed on the target’s computers plus $3,500 for BSA’s attorney’s fees. In many instances, the BSA’s settlement proposal is substantially more than the target may have expected due to differences of opinion regarding what constitutes valid proof of ownership. In our experience, the BSA usually takes three to six months to make substantive response following the submission of the self-audit materials.

Negotiation of Monetary and Non-Monetary Terms of Settlement (6 to 24 months)

After the BSA makes its initial settlement demand, there are various monetary and non-monetary terms that need to be negotiated. The obvious material term in every BSA audit negotiation is the amount of any monetary amount to be paid to the BSA for alleged past infringement. The most significant non-monetary issue is whether the BSA will agree to a confidentiality provision. Such provisions require the BSA to keep the existence and details of the audit confidential and precluded BSA from issuing a press release. Negotiations over confidentiality provisions can be extremely protracted as the BSA agrees to such provisions in only very limited circumstances. Other non-monetary provisions include future obligations such as certifications of compliance, adoption of a software code of ethics, and production of additional proofs of purchase to the BSA for purchases made after the audit effective date. The length of the negotiation process differs from case to case but generally lasts between six months and two years.

One of the first things I ask a prospective client is: What is the date on the initial letter you received from the BSA? The date on the initial in a BSA letter is often referred to as the Audit Effective Date. This date is important for many reasons. I like to tell my clients that a BSA audit measures a snap-shot in time – what BSA member software was installed on the company’s computers as of the Audit Effective Date. Once you have an accurate inventory of what was installed on the Audit Effective Date the next step is to determine what proofs of purchase are available to establish purchases prior to the Audit Effective Date.

When a BSA audit matter is settled, the target is required to certify that the audit results provided during the course of negotiations are true and correct as of the Audit Effective Date. For this reason uninstalling software that was installed on the effective date, or purchasing software products after the effective date have no impact on the BSA’s calculation of fines in BSA audits. It is critical to obtain an accurate inventory of the software installed on the target company’s computers as quickly as possible following receipt of the initial letter from the BSA. Failure to understand the importance of the Audit Effective Date, has caused companies to go on software buying sprees in response to a BSA audit and to report results to the BSA reflecting the software installed on a date after the Audit Effective Date. I believe that both of these strategies are mistakes that should be avoided.

If your company has received a letter from the BSA requesting a software audit, you are probably wondering whether you should cooperate or tell the BSA to pound sand. I advise my clients to cooperate but to do so in a manner that will not jeopardize their legal position in the event that cooperation does not result in an acceptable out-of-court settlement. This advice is predicated on the fact that business clients almost universally seek a resolution that has the lowest total costs and the most predictability. In BSA audits, these costs are software licensing fees, fines payable to the BSA, attorney’s fees, organizational impact, and the potential damage to brand associated with negative publicity. In my experience, a properly handled BSA audit can always be resolved for a lower total cost through cooperation than through litigation.

Most importantly, cooperation does not preclude litigation in the future if the BSA is unreasonable in its approach to settlement. In other words, you can always go to court if the out-of-court, lower total cost approach is not satisfactory. However, we have seen audit targets and other lawyers make several mistakes that actually detriment their legal position during negotiations with the BSA. The two critical success factors to properly handling a BSA audit or making sure that the information gathered during the process, which would not otherwise be discoverable in a court proceeding, is protected by attorney work-product and attorney client privileges. In addition, no information should be provided to the BSA unless and until the BSA agrees that the information is governed by Federal Rule of Evidence 408 and therefore will not be admissible in court if an out-of-court resolution is not reached with the BSA. The only time I have deviated from this advice has been where the audited entity was not a viable going concern and the principal(s) were judgment proof. If you have been contacted by the BSA, you should contact an experienced attorney to assist you with strategy.

The targets of BSA audits frequently believe that they know who reported them to the Business Software Alliance. Justifiably angry, they want to know what legal recourse they have against the informant. Because the informants are frequently out of work, having been fired by the target, I advise my clients about the number one rule governing litigation: never sue poor people. Legally speaking, the most probable cause of action against an informant in a BSA audit would be based upon a breach of an employment agreement containing a confidentiality provision. We have frequently assisted clients in drafting letters to former employees presumed to be the informant, forcefully reminding them of their confidentiality obligations, but have come short of advising clients to file suit against a presumed informant.