High-Tech Piracy : Dispute Points Up Copying Controversy

Times Staff Writer

The president and founder of Vault Corp, W. Krag Brotby, sees his company's main product as something like a lock that's been picked.

The lock in this case is Prolok, a system that the Newbury Park firm developed to prevent the copying of personal computer software and thus thwart the piracy plaguing the software industry.

The lock picker is Quaid Software. The Toronto company openly acknowledges that it cracked Vault's codes and modified its CopyWrite software package for computer users to skirt Vault's defenses and duplicate programs.

Robert McQuaid, Quaid's president and a man who boasts of his ability to smash software protection schemes, argues that Brotby's product unfairly prevents honest computer users from making backup copies for their programs.

Vault's dispute with Quaid has ended up in federal court in New Orleans, where a judge is expected to rule soon on a possibly precedent-setting, $100-million suit that Vault filed last year. The outcome, many legal experts believe, could set a standard for the amount of protection that software makers are entitled to against unauthorized copying.

Brotby contends that, without protection, unauthorized copying--whether by office workers, sophisticated computer hobbyists or bootleggers--will spread. He cites a 1984 study by Future Computing, a Dallas-based market researcher, estimating that software makers lose nearly $800 million in sales each year to piracy. Others doubt that the extent of the problem can be determined, but there is widespread agreement that it is costly.

Even so, the software industry has mixed feelings about Vault's case and software protection in general. Software Publishing, the nation's fourth-biggest independent maker of personal computer software, is dropping copy protection on all of its products. Microsoft, the nation's second biggest, is eliminating it on a selective basis.

The moves were prompted by pressure from users who complain of being prevented from making "archival" copies, which they need in case they damage their original disks. Software makers add that it often is futile to build software protection systems because they constantly are being broken.

According to some computer trade journals, Torrance-based Ashton-Tate, the third-largest software maker in the nation, may release unprotected software to some of its largest customers with the understanding that the firms will voluntarily police its use.

The leading holdout for copy protection among software companies is Lotus, the nation's No. 1 independent. Lotus spokesman Bruce Rogers said the company believes that copy protection systems are effective, and he added that Lotus provides buyers an extra copy of its software to eliminate the need for making a backup.

Brotby said software protection not only thwarts piracy by those who want to sell bootleg copies but also gives businesses tighter control over the software they buy. That, he said, could head off costly suits from software firms trying to crack down on unauthorized copying by a company's staff.

For Vault, a favorable verdict would be encouraging news for a 3-year-old company beset with problems. Last October, the privately held company filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, listing $1.66 million in liabilities and $1.63 million in assets. Brotby said filing was prompted by a dispute with 3M over a contract for the Minneapolis-based company to sell Vault's product.

Vault's Prolok product is a disk bearing a unique physical mark--or "fingerprint"--and electronically coded instructions requiring the program to find the fingerprint before starting to run.

Software makers put their programs on the Vault disk. Although those programs can be copied onto another disk, the fingerprint can't. Consequently, when the unauthorized copies are inserted into a computer, the program refuses to run for want of a fingerprint.

Vault sued Quaid in Louisiana because it is one of only two states with a Software License Enforcement Act, better known as a "shrink-wrap law." Vault's suit is the first test of Louisiana's 1984 law.

Like book publishers and record companies, software companies are protected by federal copyright laws. The Louisiana law, which Vault's attorneys helped draft, gives companies tighter legal defenses against the copying, reselling and renting of their software by adding what is called license protection.

Under the shrink-wrap law, anyone who breaks the plastic wrap that software makers "shrink" around the disks that they sell agrees to abide by a agreement that must be clearly written on the package. In effect, the agreement licenses the buyer to use the software.

Vault alleges in its suit that Quaid broke the licensing agreement for its product, violated trade-secret laws and infringed on its patent.

Traditional Agreements

Marc Guren, a Los Angeles attorney who has written extensively on software protection laws, said the license agreements cited in the shrink-wrap law are an outgrowth of the kind of contracts software companies historically have required mainframe computer users to sign. Those contracts typically seek to protect software makers against abuses such as using programs on more than one computer, he said.

Guren said that, because it would be impractical to require personal computer users to sign contracts, software makers developed the idea of having users, in effect, agree to terms spelled out on the packages. He said, however, that it is uncertain whether opening a package can be considered entering into a binding agreement because the consumer doesn't accept the terms orally or in writing.

The only other state with a shrink-wrap law is Illinois. Several states, including California, are considering bills, but no other state seems close to passing one.

Brotby claims support from much of the software industry. But ADAPSO, the software industry's main trade group, said it has declined to take a position on Vault's suit, partly because officials with the Arlington, Va.,-based organization believe that Louisiana's shrink-wrap law is faulty. Mary Jane Saunders, ADAPSO's assistant general counsel, said she believes that the law is too vague in defining what software makers may require of users, which makes it difficult to enforce and puts it on shaky legal ground.

Group Opposes Vault

Vault's suit has been a lightning rod for opponents of copy-protection systems. Capital PC User Group, a Bethesda, Md.,-based group of 4,200 computer users in the Washington area, recently filed court papers opposing Vault's position.

"Software companies act like they are lending you your software. It is the only consumer commodity that is treated that way," said Jerry Schneider, president of the group.

McQuaid, of Quaid Software, argues that software makers deserve no more legal protection than do book publishers and record makers, who have prospered even though their products may be duplicated easily.

"You can go to a Xerox machine with a copyrighted book and copy it," McQuaid said. "Somehow, book publishers managed to stay in business even though there are a lot of Xerox machines out there."

Vault's battle with Quaid has turned bitter and personal. Brotby refers to McQuaid as "kind of a phantom," saying that he refused to answer questions about his background during a deposition and has refused to testify in court.

He said a private detective in Canada, hired by Vault, was unable to find any background on McQuaid's activities before 1978 and has been unable to verify McQuaid's claims that he once worked at Princeton University and attended the Massachusetts Institute of Technology.

McQuaid bristles at Brotby's suggestions. McQuaid said he is 42, a native of Toronto and has worked in the computer business for 18 years, including jobs with Sperry and Burroughs.

He said he dislikes discussing his background in depth because it is unusual. He said he can prove his claims, but is refusing to answer personal questions because he believes them to be irrelevant.

"The issue here is the law, not where I went to high school or kindergarten," McQuaid said.

Brotby said McQuaid actually wants to get into the software protection business, saying he once offered to buy Vault.

McQuaid acknowledges that he offered Vault $50,000 for a controlling interest in the company last year, but only because he wanted to settle the lawsuit and save on legal fees.

Now, McQuaid said, he's no longer interested.

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