Software Compliance Legal Issues – D & O liability

Introduction

One question that often pops up in an SIIA or BSA software audit is whether the officers or directors of the company will be held liable for money damages, attorney fees, or even punitive damages if a company is found to have software licensing shortages on its servers, networks, and laptops.  This blog discusses federal copyright law in this regard. Liability of CEO, COO, CFO, CIO for Federal Copyright Infringement In Fermata Int'l Melodies, Inc. v. Champions Golf Club, Inc., 712 F. Supp. 1257, 1262 (S.D. Tex. 1989)  aff'd sub nom.  Fermata Melodies v. Champions Golf, 915 F.2d 1567 (5th Cir. 1990), the Southern District Court in Texas noted: “Cases have held that all participants in copyright infringement are jointly and severally liable as tortfeasors. Screen Gems-Columbia Music, Inc. v. Metlis & Lebow Corp., 453 F.2d 552, 554 (2d Cir.1972); Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971).

A corporate officer may be held vicariously liable: (1) if the officer has a financial stake in the activity and (2) if the officer has the ability and right to supervise the activity causing infringement. Van Halen Music, 626 F.Supp. at 1166-67; Warner Bros., Inc. v. Lobster Pot, Inc., 582 F.Supp. 478, 482 (N.D.Ohio 1984).” These are two elements to keep in mind.  For example, if a “vice president” (executive VP) of a company has the legal right and authority to “ run the day to day business” and part of that business involves overseeing the IT Department, or in the case of Autodesk audits, running the engineering group or architect group, and that VP is compensated with a percentage of the profits for that division or group (or with bonuses), and the VP has the ability to supervise the activity that results in infringement of software copyrights (i.e. they had the ability to supervise and oversee employees and independent contractors who use the software in their business), then it is possible that they can be held liable when architects, engineers, employees, project managers or other IT contractors download, install and use unlicensed computer software to generate profits for the company.  In the Fermata case, the Court analyzed these two prongs in finding a corporate officer jointly and severally liable for copyright infringement of music.

The Court noted: “First, the Court will discuss the direct financial interest that Defendant Jack Burke, Jr. (“Burke”), the corporate officer, in this case, has in the infringing activity. The Court notes that Defendants admit that the corporate Defendant has for the past thirty years, and still does, own and operate the Champions Golf Club……Defendant Burke is one of the founders of the Champions Golf Club, Inc. (“Champions, Inc.”)…….Burke has been the president and a director for thirty years and is the majority shareholder of Champions, Inc. (Burke Deposition pp. 7-8, 10). Burke receives a salary from the corporation (Burke Dep., p. 19). The evidence is clear that both Defendants have a direct financial interest in Champions Golf Club. The first prong of the officer's test for liability was thus met.  The Court then discussed the second prong of the test: “Second, the Court will consider Burke's ability and right to supervise the activity which caused the infringement. Defendant Burke directs the operations of the club and is listed on the club's Texas Alcoholic Beverage Commission license as the “ person responsible” (Burke Dep., pp. 20-22, and Exhibit 1). He is responsible for the hiring and firing of the various heads of departments at the club, including the manager in charge of food and beverages (Burke Dep., pp. 22-23).

Burke is in charge of the day-to-day operations of the club and has final approval of all decisions involving the club (Burke Dep., pp. 24-26). If the members of the club did not like the music being played in the club's restaurant, Burke would ensure that the music was changed (Burke Dep., pp. 24-25). Burke was the person contacted by ASCAP and Burke decided that the contacts would be ignored (Burke Dep., pp. 29-35 and Exhibits 3-5). Accordingly, the Court holds that Burke had the right and ability to control the infringing activities.

Thus, the Court finds that the individual Defendant and the corporate Defendant will be jointly and severally liable for the copyright violation.“ As you can see, this rule sweeps in a lot of unsuspecting officers, CEO, VPs, and other directors of the company who are physically present and make the major company decisions.  If this describes you, if the BSA or SIIA, Autodesk, Microsoft, or other software companies find evidence of infringement on your computer networks, the claim might also be made that the director and officer are personally liable (putting their assets at risk if they don't have “D&O insurance” that covers copyright infringement, and such an officer could be found “jointly and severally liable” for willful copyright infringement.

A common scenario that may raise issues of “willful” infringement can include instances where a company has many downloads and installs of a particular piece of software, but has absolutely NO LICENSES and NO PROOFS OF PURCHASE OF ANY LICENSES.  This can happen, for example, when a company illegally downloads pirated bootleg software on file-sharing websites such as BitTorrent.  

Obviously, the exposure can be HUGE.

Watch Attorney Steve explain the CEO, CFO, and IT Director's liability in regard to software piracy

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Can the officer or director just discharge any liability in bankruptcy Court (ex. chapter 7, chapter 11, or chapter 13)?

The answer to this question is a resounding “maybe.”  Many litigants jump to the conclusion that if they get sued for intellectual property infringement, they can just go into bankruptcy and get rid of the debt.  This is not always true, and sometimes the litigant may have significant personal assets that make bankruptcy a “ court of last resort.”  One case that discussed discharging liability in a bankruptcy court for willful infringement is  In re Barboza, 545 F.3d 702, 709 (9th Cir. 2008).  We have briefed this case in another blog.

Liability for “failing to prevent” copyright infringement

In  Atl. Recording Corp. v. Chin–Liang Chan (In re Chin–Liang Chan), 325 B.R. 432, 448 (Bankr.N.D.Cal.2005) the Court noted that: “a person is liable for copyright infringement by another if the person has a financial interest and the right and ability to supervise the infringing activity “ whether or not the person knew of the infringement.”  The court held that “the  Bankruptcy Judge clearly erred by inferring from the jury's finding of willful infringement that Appellants had actually ordered the copying themselves. As principals in the company, Appellants could be held liable for infringement simply for failing to prevent copyright infringement. This case highlights the importance of “not turning a blind eye” and not “burying your head in the stand.”  Ignorance may not be a good defense to software licensing shortage cases.  The VPS, officers, and directors should supervise, monitor, and oversee their internal operations, especially where expensive software like Autodesk is used to run the company or division. Training employees and independent contractors on the proper licensing and usage of all software being used in the project is another key to guarding against legal risk and exposure.  Having and enforcing policies and procedures for proper software usage and enforcing those policies can be one of the most important CYA steps key executives can take.  Failure to take these steps could lead to the accusation and charge that personal liability should attach to the officer given their financial interest in the outcome of the project, and their ability to control, supervise, or monitor users.

Contact a Software Compliance Law Firm

Our firm handles copyright law matters including infringement cases, BSA, SIIA, Autodesk, and Microsoft audits and federal copyright litigation.  Contact us at (877) 276-5084 for a no-cost confidential discussion.  You may also leave your contact information below to have one of our intellectual property attorneys contact you, normally within the hour.  We offer flat rate fees and tenacious representation for both Plaintiffs and Defendants.