Microsoft Corp. on Tuesday announced that it was suing resellers for allegedly buying and selling counterfeit and misused Certificate of Authenticity labels.

The company filed eight lawsuits in seven states against defendants accused of distributing counterfeit Microsoft COA labels and distributing COA labels in an attempt to authenticate unlicensed software. The lawsuits resulted from a Microsoft test-purchase program conducted over the last year.

The lawsuits, which allege copyright and trademark infringement, were filed against Monarch Technology Inc., of San Clemente, Calif.; Kenneth Xu, of Union City, Calif.; Era Limited, of Lake Zurich, Ill.; Micro Info Tech (USA) Corp., of Edison, N.J.; Affordable Computer Warehouse, of Clinton, N.Y.; Warp Systems/Computers LLC, of Raleigh, N.C.; Master Computer Inc., of State College, Pa.; and Software Provisions of Vancouver, Wash.

Channel Insider was unable to reach officials at any of these companies.

The defendants continued their distribution of counterfeit COA labels or unlicensed software even after they were contacted by Microsoft with cease-and-desist letters requesting that they halt their illegal activities, according to Bonnie MacNaughton, senior attorney for Microsoft's law and corporate affairs office.

"We bought thousands of COAs, and warned hundreds of businesses that this is illegal," said MacNaughton. "The ones we sued were continuing to engage in the same illegal behavior. We don't want to sue anyone who misunderstands what they're doing. We want to educate users and get them to move from illegal to legal behavior."

Standalone COA labels are used to induce businesses and consumers to acquire counterfeit or unlicensed software. Customers who acquire Microsoft software with counterfeit COA labels or who purchase computers loaded with unlicensed copies of Microsoft software on which COA labels are affixed are unable to obtain the technical support, product upgrades and other services available to customers with genuine Microsoft software.

"The practice of selling or using COA labels that do not correspond with the appropriate software is the same as distributing an appraisal certificate for a diamond separately from the sale of the diamond. A COA label has no independent value if it is separated from the software it authenticates," said Pip Marlow, general manager for U.S. Partner Enablement at Microsoft, in a statement.

Click here to read about Microsoft's expanded Windows anti-piracy program.

The resellers who use the fake or unlicensed COAs, of course, don't have to pay Microsoft, and this gives them an unfair advantage over Microsoft's legitimate partners, said Michael Cherry, a Windows analyst at Directions on Microsoft, a research firm based in Kirkland, Wash.

David June, director of development and business relations for Northwest Computer Supplies, a systems builder in Bellingham, Wash, agreed. "Resellers who use illegitimate COA labels or pirated product keys to hoodwink consumers undercut honest businesses and create a competitive disadvantage in the marketplace," he said.

The effects go beyond lost business, too, he said. "It cascades. First, there's the lost business. Then, because of the unfair competitor, your customers wonder about your pricing. Then, you have to educate your customers, and then you have customers that are burned by bad software and they become cynical about buying the legal product. And, behind it all you have people who are involved [in] organized crime with it. At the ground level, you lose jobs and the standard of living declines."

Next page: Piracy proliferation.

June applauded Microsoft's attempts to educate resellers, and the company's decision to prosecute those allegedly distributing counterfeit labels. He's not the only one that feels that way.

Partner reaction played a big part in calling Microsoft to action, MacNaughton said. "In the last year or so, there has been a groundswell of requests from [the] partner community [to] level the playing field so they don't have to compete against people who are selling illegal software."

In addition, she said, illegal piracy is spreading. "We've seen a real proliferation of this illegal piracy model in the last twelve to eighteen months. There are literally dozens of companies selling illegal COAs. Once separated from the software they have no value, but people are making large profits from selling these stickers."

MacNaughton said there are hundreds of businesses in the United States whose primary business model is selling fake COA labels, and they're not even trying to hide it. "These companies are operating fairly openly. They're not operating on an underground basis. But, we do expect that there are others that are operating covertly," she said.

There is an entire secondary marketplace for standalone COAs, MacNaughton said. Some are high-quality counterfeits, and some are genuine COAs that have been sold separately from the software that they were intended to authenticate.

According to MacNaughton, counterfeit labels are sometimes distributed and positioned as valid software licenses by businesses on the Internet. Standalone COA labels are often purchased by computer manufacturers that copy unlicensed Microsoft software onto computer systems and attempt to authenticate it with the invalid labels in a practice commonly known as hard-disk loading.

Another abuse of COA labels involves software resellers pairing the separated labels with unlicensed or counterfeit software. Such companies unfairly compete in the marketplace with the thousands of legitimate Microsoft partners that deliver legal software to their customers.

"This program is targeting people who are selling illegitimate copies of Windows. This will help the people who are doing it fairly," Cherry said.

A COA label helps identify genuine Microsoft software. For preinstalled Microsoft Windows operating systems, the COA label should be affixed to the PC chassis and should not be removed from the PC.

When the Windows operating system is acquired separately from the computer, the COA is affixed to the top of the box. The COA includes sophisticated anti-counterfeiting features to help verify the software's authenticity. The COA label also includes a product key code, which is used if the operating system needs to be reinstalled.

More information on COA labels can be found at Microsoft's How to Tell Web site.

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