Risk prevention relating to OEM and on-demand software

By Cheng Zhen, Lenovo China,[Patent]

Software pre-installation (i.e. OEM software) has been a relatively mature business model in the industry. But with the development of network technology and diversification of services, software pre-installation, when inadvertently executed, might cause big trouble.

I. Pre-installation, on-demand installation and software piracy

OEM, as defined on Microsoft Website, “refers to software that comes installed when a customer purchases a new computer or a hard drive, etc., and the price thereof has been covered in the cost of the hardware. As the hardware vendors purchase directly from software vendors, OEM software can only be used along with the hardware and cannot be split for resale, or reinstalled on other hardware.” In other words, OEM is the licensed presale software installed or provided by manufacturers for end users (including individuals and commercial users).

In practice, however, software may also be pre-installed on demand of and tailored at the request of the users who supply the software. The business model is essentially an installation service rendered by hardware manufacturers at the request of users, and the author deems it is more appropriate to term it as “on-demand software.” The business model is rather complex, involving, in practice, vendors and service providers, and it is more likely to cause infringement disputes arising from infringement in the business model.

According to statistics from 2012 Report on China’s Software Piracy Rate, the piracy rate totaled 36% in terms of paid software, including 36% of information security software, 53% of office software, and 23% of operating systems software.

According to a survey conducted by Ipsos Public Affairs in January and February 2012 covering approximately 15,000 computer users in 33 countries, the average piracy rate hit 33% in the European areas with relatively benign IP protection environment, 60% in Asia Pacific, 62% in Central and Eastern Europe, and 61% in Latin America. It can be seen that it is indeed difficult for software right owners to achieve 100% licensed software usage. However, the widespread piracy has also left much room for rights owners to fight for their rights and interests.

Then, how should providers of OEM or on-demand software prevent risks of infringement and ensure business security? The author intends to briefly explore the following.

II. Risk prevention relating to OEM and on-demand software

1. OEM and on-demand software by hardware manufacturers

1) OEM Software by Hardware Manufacturers

According to Article 53 of the Copyright Law, a publisher or producer of a reproduction shall bear legal liability if the publisher or producer fails to prove that the publication or production thereof has been lawfully authorized. Article 28 of the Regulations of Computer Software Protection provides that a distributor of a reproduction, or a lessor of a reproduction of a cinematographic work, a work created by means similar to cinematography, computer software, a sound recording or visual recording shall bear legal liability if the distributor or lessor fails to prove that the reproduction distributed or leased thereby is lawfully sourced.

The key to OEM software, whether for individuals or commercial customers, is that a license should be obtained between the hardware manufacturer and the software owner for lawful authorization of the reproduction of the software; then a hardware or a medium with the software as a bundle is sold to the end user. In this business mode, the hardware manufacturer serves as a producer and sub-licensor of the software reproduction. In practice, the software owners generally will sign a software licensing agreement with the hardware manufactures to specify their respective rights and obligations. If the hardware manufacturer neglects to obtain authorization or fails to take full consideration at the time of signing the agreement, it will probably face infringement claims or administrative penalties from regulatory authorities. Therefore, the hardware manufacturer should consider acquiring at least the following rights before installing the software: (1) the right to pre-install software on its hardware products (with a specified list) or bundle copies of pre-installed software with its hardware products and resell them to end users; (2) necessary proprietary and servi c e warranties from software owners; and (3) adequate indemnification to cover liabilities and damages in case of software infringement.

2) On-demand installation of software by hardware producers

In direct sales, a hardware manufacturer frequently encounters demands from commercial users to install software for them, namely, the software provided by commercial u s e r s t o b e installed onto the hardware before sales. A question ensues, because the replication is carried out by the hardware manufacturer, does it mean that the hardware manufacturer has to obtain license from software owners?

The Copyright Law is silent in this regard, but Article 16 of Regulations of Computer Software Protection (the Regulations) provides that “lawful owners of software reproductions are entitled to the following rights to install the software onto a computer or devices with information processing capabilities according to needs of use; Article 30 of the Regulations provides that “No damages shall be available if holders of software reproductions do not know or do not have reason to know that the software is an infringing copy; however, injunctive relief may be available for enjoinment or destruction of the infringing copies etc.”

In the aforesaid Regulations, there are two concepts, namely, lawful owners of software reproductions and holders of software reproductions. Some scholars view the former as to mean entities, including individuals or legal persons, that purchase genuine copies from rights owners or their licensed distributors, accept donated copies or obtain license to use genuine copies. Obviously, commercial users act in the capacity. It is a legal right for commercial users to install the licensed software onto computers, as long as it is not prohibited or restricted by law and does n o t affect rights of others, and they will also have the right to entrust others.

In this case, hardware manufacturers, on demand of end users, complete copying of the software, only temporarily controlling and holding software products in the capacity of holders of software copies.

Therefore, it is unnecessary (in most circumstances also impossible) for them to obtain authorization from software copyright owners. In line with the principle set forth by Article 30 of the Regulations, the criteria to determine infringement of holders of software copies lie in whether they subjectively know or should know the software they hold is an infringing product. Therefore, only if hardware manufacturers prove that they do not know and there are no reasonable grounds for them to know the software infringement, can they be exonerated from liabilities.

The author suggests that in practice a hardware manufacturer should: (a) exercise reasonable and prudent duty of care. For example, it may ask its staff, in negotiations, to demand rights certification (software copyright registration certificates or license documentation) from commercial users as a bargaining point; if commercial users can not provide foregoing proof, the hardware manufacturer should act with care and refuse to install; (b)while keeping rights certification recorded, the h a r d w a r e ma n u f a c t u r e should also require commercial users to produce necessary d o c u m e n t s o f rights guarantees or undertake in the sales contract that they guarantee the legitimate source of software products, seek solutions and bear liabilities in the event of infringement.

It is worth noting that special care should be exercised, i f commercial users are not software rights owners that only provide the hardware manufacturer with a mirror file or master disk. As a precautionary measure, the hardware manufacturer should verify whether the authorization provided by software rights owners has expressly permitted commercial users or the hardware manufacturer to make reproductions from the mirror file or the master disk (including restrictions on the number of copies).

Despite the firewall, the hardware manufacturers still need to note that as soon as they get to know that the software copies are infringing, they must fulfill the legal obligations to cease copying and destroy the copies.

2. Pre-installation and on-demand installation of software by hardware vendors

In fact, in order to increase sales and meet customers’ demands, the circumstance of hardware vendors pre-installing unauthorized software has become the most chronic headache for software rights owners and has been the target of fight against infringement. Take Microsoft for example, in 1999 Microsoft sued Beijing Yadu Science and Technology Co., Ltd., which marked its beginning to launch anti-piracy operations in China; in 2008 Microsoft sued two companies of Hisap High Technology Corporation, demanding cease of illegal pre-installation and sales of Microsoft software, and was ultimately awarded 700,000 yuan in compensation; in June 2009 Microsoft sued Beijing Strong Well Future Technology Development Co., Ltd. for sales of pirated pre-installed Microsoft software and was awarded 460,000 yuan; in 2010 Microsoft sued 10 domestic computer distributors that had pre-installed pirated software; in July 2012 Microsoft announced initiation of lawsuits against 9 computer distributors in 7 cities across China, etc. Fang Xingdong, an domestic Internet expert, once commented, “80% of Microsoft’s revenue in China comes from fighting against piracy. For Microsoft, fighting against piracy is more profitable than selling genuine copies in China.”

In face of increasingly mature market environment and stronger IP protection policies and measures, sellers should consider not only the cost of piracy and legal risks that may follow, but also self-protection at request of end users, such as: (a) exercise reasonable duty of care and ask end users to provide rights certification; and (b) ask end users to confirm on the relevant service files that the software installed is supplied by end users themselves and have obtained legal authorization.

3. Service providers provide or help install software

1) Service providers offer software directly to endusers

In 2008 Microsoft filed a lawsuit against the Tomato Garden, which can be seen as the milestone antipiracy lawsuit in its history. Tomato Garden website mainly provided download services of Windows XP and other pirated software. In August 2009, Suzhou Huqiu District Court rendered a first-instance judgment that the author of the Tomato Garden version of Windows XP, and also person in charge of Tomato Garden website, was sentenced to three and a half years in prison and fined 1 million yuan; the accused Chengdu Share Software Net Science and Technology Co., Ltd. was fined 8.77 million yuan and confiscated illegal earnings of 2.92 million yuan.

In November 2012, Shanghai’s Ruichuang Network Technology Co., Ltd. repeated the same mistake and was brought to task by Microsoft demanding US$100 million in infringement claims on the ground of unauthorized illegal online dissemination of Microsoft software. The two parties finally reached a settlement through mediation by the court, and Shanghai Ruichuang made a formal apology and paid 36 million yuan in compensation.

Therefore, if service providers, for business purposes, directly offer software services to end users, they should be software rights owners or obtain permission from software rights owners, otherwise they will face significant legal risks.

2) Service Providers Install Software at End users’ Request

In practice, service providers (including business entities that provide maintenance and value added services for hardware products, or technical services for users via Internet) will also encounter a variety of requests to install software. If service providers install software for commercial users, then they will have exactly the same applicable laws and responsibilities as the aforesaid hardware manufacturers, and may take the same precautionary measures as discussed before. The following measures are listed briefly to avoid risks according to circumstances in this regard.

(1) Service providers help install software provided by customers via network or at home

Service providers should require their technicians to have the ability to identify obvious acts of infringement, for example, if consumers request installation of Windows 8, but fail to provide purchase proof and there is no way to ascertain genuine logos. Moreover, if the software is about to be installed, customers should be asked to endorse the language to the effect that the software to be installed is provided by customers who must guarantee the legitimate source of the software.

(2) Service providers help consumers install free software at home
In terms of such services, we must distinguish between the following two circumstances carefully:

A. Helping consumers install free software for a fee

If service providers download free software into the storage device, visit consumers, let consumers make a selection and install software for a fee, it will be an obvious commercial activity. In general, popular social networking software such as Tencent QQ is only available to consumers for free, but not to commercial users. Therefore, implementation of such fee-based services without authorization from software rights owners would be easily declared infringing. Can service providers store the software into the device in advance and install it free of charge for consumers for the sake of consumers’ convenience? The author thinks that it all depends on the license scope and conditions of the free software. For example, QQ Software License and Services Agreement provides that “Tencent grants you a person a l , non - transferable and non-exclusive license to use this software. You can, for non-commercial purposes, install, use, display or run this software in a single terminal device; and that without written consent from Tencent, you may not, for any commercial or non-commercial purposes, implement, use or transfer such IP rights or license any third party to do so.”

B. Installing free software for consumers at home

If service providers, at the request of consumers, visit consumers and help them complete free download services based on consumers’ hardware and conditions, which, in essence, still falls into the reasonable scope of fair use by consumers, and service providers only serve as mere service providers; however, as previously mentioned, service providers still need reasonable common sense. For the sake of prudence, service providers may preferably ask consumers to confirm in writing possible consequences as a result of downloading and use of the free software.

With the continuous development of the service industry, types of services relating to software products are becoming more complex. Companies, in addressing these issues, need to fully assess IP risks, and take effective preventive measures to ensure safe operations.

(Translated by Wang Hongjun)


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