The Empire Strikes Back

Daniel Ruen

February 3 was just another day in the ongoing antitrust battle between the U.S. Justice Department and Microsoft Corporation in Washington, D.C. But for three small Minnesota-based computer resellers, it was the day that the software giant sued them in federal court, charging that their businesses traffic in pirated software.

Microsoft took the copyright-infringement action against First Micro Group of Edina, Orion Systems of Fridley, and Retreads Inc. of Rochester, which does business as a Computer Renaissance franchise. In the latter case, Redmond, Wash.-based Microsoft alleges that on December 9 of last year, an "undercover investigator" bought a computer with an "infringing copy of Microsoft Office Pro 97" installed on it. The allegations mirror those against the other resellers. The owners of all three declined comment.

Local resellers have known since last year that Microsoft was sniffing around the premises. Phil Stegora, president of the Minneapolis-based computer reseller A1PC Source, recalls that Microsoft folks dropped in on him last spring: "They were in town basically checking out to see who was selling legal product and who wasn't," he says. Broadly defined, pirating software includes everything from illegally producing copies to loading multiple copies of a single program onto several different computers. "Without even realizing it for a while, we were getting some counterfeit software," Stegora explains--on used machines brought in for sale; A1PC, he says, would then sell the computers.

But no more. "After they stopped by, we pretty much discontinued anything off the gray markets," says Stegora, who now works strictly through authorized Microsoft distribution channels. Which hasn't exactly allowed him to keep pace with competitors who still offer rock-bottom prices for their fully (and illegally) loaded merchandise. When an official copy of Microsoft Office Pro costs in the neighborhood of $500, it's not hard to see the economic incentives for counterfeiting or illegal copying. Stegora says he's seen a fair amount of fake software at local shows, including copies of Office Pro for as low as $55. Making an unlicensed copy of someone else's program costs nothing.

In Microsoft's view, Stegora and his competitors are in the legal clear when selling used computers with software already installed, as long as they have documentation from the original, legally licensed user. "Their feeling is, as long as you receive it with the certificate of authenticity and the CDs, everything should be fine," he says. "But 9 out of 10 users never bring that stuff in." To be on the safe side, Stegora has taken to simply wiping programs off the second-hand computer, leaving it up to the customer to buy new software.

As for the three Minnesota resellers sued in federal court, they are just getting a taste of what has already happened to many of their brethren around the country. According to Janice Block, Chicago-based corporate counsel for Microsoft, the company filed 160 piracy-related lawsuits in the U.S. in fiscal 1998, and expects to file more than 200 actions by the end of this June. Typically, the company files a stack of lawsuits against resellers in a single city on the same day--recent targets include San Francisco, Dallas, and St. Louis--using the occasion to gain publicity while heralding its "investigative sweeps."

Block is in charge of Microsoft's anti-piracy efforts in the central region, stretching from Minnesota down to Texas. She says the company isn't doing blanket checks of all recycled-computer dealers, but rather responds to tips it receives via e-mail and anti-piracy hotlines about alleged misdeeds. The company then dispatches investigators to make a purchase. If they find what they believe to be counterfeit or unlicensed Microsoft software installed, they fire off a cease-and-desist letter to the dealer. Later, they return for a followup; if they turn up more bootlegged goods, Microsoft, as in most instances of late, then files suit.

Block identifies five different types of software piracy, including counterfeiting (manufacturing illegal copies), the copying of unlicensed software by an individual or business, and "hard-disk loading"--that is, selling a PC with illegitimate software preinstalled by the reseller. In the current Minnesota cases, Microsoft charges First Micro and Orion with counterfeiting and Retreads with hard-disk loading. "It is absolutely Microsoft's goal," she says, "to get these three companies to stop the software piracy that they've been engaging in."

Some might have trouble feeling much sympathy for Microsoft's claims of lost revenues from copyright and trademark infringement. For the fiscal year ending in June 1998, the company posted nearly $4.5 billion in profits on sales of close to $14.5 billion. But remember, Block contends, "This is not just a Microsoft issue. It's a software industry issue and a public and economic issue." Microsoft claims that software piracy cost the Minnesota economy some $340 million in 1997 in sales and taxes, as well as wages and salaries for 3,100 lost jobs.

Rick Krueger, president of the Eagan-based Minnesota High Tech Association, agrees that software piracy has long been a widespread concern, but says studies have shown that the general public doesn't share the software industry's ire. "It isn't viewed as theft, which is one of the problems," he laments. Krueger says his group would prefer an awareness campaign rather than court action, which can cost small resellers thousands in legal fees: "Ideally, what we'd like to do is get to a point where people voluntarily comply."

As it turns out, Microsoft's actions are right in sync with other industry efforts to curb software bootlegging. The Washington, D.C.-based Business Software Alliance (BSA), which estimates that piracy costs the industry $2.7 billion a year in the U.S., targets businesses around the country using counterfeit or unlicensed software. They figure the piracy rate at 27 percent across the nation, meaning, by their count, that one out of every four pieces of software isn't legal. Last fall, the BSA, which counts Microsoft as a member, unveiled an anti-piracy radio and print ad campaign in several Midwest cities (including Minneapolis and St. Paul), encouraging people to "Nail Your Boss" and "Blow the Whistle."

In October, Microsoft filed lawsuits similar to the Minnesota actions against four computer resellers in the Charlotte, N.C., area. Patent attorney Philip Summa, who is representing a Computer Renaissance franchisee sued there, says he has no problem whatsoever with Microsoft's right to defend their copyrights, but he believes Microsoft to be overstating the gravity of the situation. "It appears to me that there is a bad apple that got into our store. That would imply there could be a few bad apples, but no more," Summa says. He likens Microsoft's tactics to those the U.S. government uses to fight its drug war, where pursuing small retailers proves an easier feat than tracking down big producers. "Who do you go after?" Summa asks. "Pablo Escobar in Colombia, or the junkie on the street?" Producers who flood the market with bootlegged software, or the puny computer resale shop on the corner?

The Minnesota cases are similar to the North Carolina ones. In each, Microsoft alleges that its agents obtained one or two pieces of suspect software from the retailers; the company seeks to collect, for its troubles, "illegal profits" and damages. But the question remains: Why is such an enormous and enormously profitable company quibbling about a few questionable sales?

"Experience shows if you do two test purchases within a certain period of time and counterfeit purchases come out of both of those instances," Microsoft attorney Block reasons, "the conduct is really extensive at the company." And for every one of those bootleg transactions, Microsoft loses a potential customer. But rest assured, pirates: For the time being, she says, home computers loaded with counterfeit or unlicensed software remain safely out of suit-happy Microsoft's sights: "That's not something we and other software vendors can police."

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