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MBC Enterprises LLC and Microsoft Corp. are now headed back to trial over allegations of buying and selling counterfeit software after MBC won its appeal.

Microsoft had won a summary judgment against MBC, a Salt Lake City software distributor, for $990,000, plus a permanent injunction prohibiting the defendants from engaging in a wide variety of business activities related to Microsoft products.

Microsoft had alleged that MBC purchased counterfeit Microsoft Windows 98 and Office software from Bantech of Cedar Park, Texas, and resold it, and that they sold counterfeit Microsoft NT Server software to Mr. Software Inc., of Sterling Heights, Mich.

This isn’t the first time MBC had been in hot water for illegally selling software. In 2000, MBC settled with Novell Inc. for $93,000 for selling Novell software stolen from Ireland. The company was permanently barred from dealing in Novell products.

MBC appealed the Microsoft decision, citing several issues that will take time to resolve. On December 29, 2004, Circuit Judge Mary Beck Briscoe vacated the summary judgment and remanded the parties to proceed to trial.

“It’s only a denial of a summary judgment so Microsoft will have to have a trial now to prove their case,” said Neil A. Smith, a member of the intellectual property practice group at Howard Rice Nemerovski Canady Falk & Rabkin, a San Francisco-based law firm. “It doesn’t mean either one is off the hook; it just means there are too many factual disputes for it to be decided without a trial,” Smith said.

One MBC claim, according to the Appellate Court’s Order & Judgment, is that James Craghead, manager of the wholesale distribution company, inspects each piece of Microsoft software by examining the hologram on the CD or its inner ring, inspecting the heat-sensitive strip woven into the fabric of each software manual or COA (Certificate of Authenticity), inspecting the holographic thread woven into each manual or COA, and inspecting manuals, COAs and licenses for appropriate watermarks.

Click here to read about Microsoft suing resellers for allegedly buying and selling counterfeit and misused COA labels.

“Craghead allegedly has personally inspected thousands of copies of Microsoft software to determine if they possess all of Microsoft’s published security protections,” the court document said.

Resellers, who requested anonymity, felt it would be highly unusual for a distributor—particularly a very small one—to do all this. One felt that such a process would be unnecessary if the distributor bought from an authorized distributor, and then practiced reasonable diligence.

Indeed, here is what might worry either MBC or any reseller who isn’t sure about the origins of his distributor’s stock: The court document said, “MBC does not typically purchase software from Microsoft-licensed vendors.”

Bonnie MacNaughton, a senior attorney for Microsoft, said, “Microsoft does have actual contracts that OEM Distributors sign that authorize them to distribute OEM software to System Builders.” The twelve in the United States include Ingram Micro, Tech Data, and Synnex.

“We also have contracts with a small number of ‘Associate Distributors’ who are authorized to acquire OEM software from OEM Distributors and redistribute it. They are also considered ‘authorized’ because of the formal written contract in place, with terms such as audit clauses,” MacNaughton said.

“However,” she added, “we do allow redistribution of our software [sometimes called subdistribution] by any party without a signed agreement, as long as they either do not open the three-pack box, or they bundle individual units of software with the required PC hardware and pass along the OEM requirements to the system builder who ultimately builds the PC. In this case, however, because there is no written contract in place, we do not list these companies in our list of ‘authorized’ distributors.”

Next page: Counterfeiters have gotten better.

Most resellers are handling multiple software titles and may not know where every package from every developer came from. An underhanded wholesaler could make an honest reseller look tainted, and the consequences could be harsh.

According to the Business Software Alliance, the copyright owner can choose between actual damages, plus profits attributable to the loss and statutory damages, of up to $150,000 for each program copied. Additional criminal prosecution for copyright infringement can cost up to $250,000, jail for up to five years, or both.

But the MBC case is about counterfeiting, which is more serious than copyright infringement, Smith pointed out. Civil suits for counterfeiting can run into hundreds of thousands of dollars, and criminal counterfeiting cases mean jail time, Smith said.

“Unfortunately, counterfeiters have gotten better,” Smith said. “Resellers have to figure out how to discern the difference. Sometimes it’s not easy to tell. The easy thing to say is, ‘buy from an authorized distributor,’ but there is a lot of authorized merchandise that moves in unauthorized channels. As best you can, [you should] buy from authorized distributors.”

Microsoft has actually provided “Red Flags” of counterfeit software, plus photos of counterfeit and genuine products. But, that doesn’t mean it’s easy to tell the difference.

Chris Sloan, an associate at the law firm of Boult, Cummings, Conners & Berry PLC in Nashville, Tenn., said tainted software “is a very difficult issue for resellers because it’s an area of law where, even if they take all reasonable precautions, they can still find themselves liable. In most cases, it won’t be cost effective to take all the steps they would need to take to be 100 percent certain they aren’t distributing pirated software.

“That said, there are some steps that a reseller can take to at least minimize the risk and minimize the potential liability. Generally, the number one priority is to take all steps necessary to eliminate any claims that the infringement was willful or intentional, since those types of claims carry much higher damages,” Sloan said.

Sloan recommended taking the following steps:

1. Ask the provider of the software for non-infringement warranties backed up with an indemnification clause. “While it may or may not allow the reseller to recover damages if the software is pirated, it will at least provide a paper trail that shows some level of diligence by the reseller,” Sloan said.

2. If there’s reason to believe that software may be suspect, ask questions. “You can’t play ostrich. If the provider doesn’t pass the smell test (e.g., prices well below market, packaging looks suspect, the goods appear to be “gray market,” etc.), or you have some other reason to suspect that the software might be pirated, don’t ignore those warning signs. Follow up (and keep a written log) in order to alleviate those concerns.”

3. Have a detailed, written, publicly posted policy on how infringement claims are handled, and adhere to it strictly.

My experience with resellers is mostly in the online world with content aggregators, who typically resell thousands of applications. In those cases, the risk is spread out pretty widely, and so the potential liability in any one instance usually very small,” Sloan said.

“It’s important to recognize that, in situations where a reseller is only going to be reselling one or a small number of applications, the risk is much higher, so a little bit more due diligence (Internet and periodical searches, making an inquiry to the source of the software if known to be a third party, etc.) would be in order in those cases.”

Jim Denison, president of Seattle Micro, a reseller and system builder, said he doesn’t have any sympathy for whiners.

“Resellers can cry all they want, but everybody knows where the real distributors are. It’s pretty plain to me where to do it right. I think people make a conscious decision about where they’re buying their product. And we fight the battle with our customers—no one wants to pay for software. There’s this sense of entitlement—everyone thinks they’re being ripped off. That mentality allows people to justify doing things that are, in my mind, questionable.”

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