STEPHEN H. LACOUNT : A Harder Line on Software : Owners, Courts Getting With the Copyright Program

During the past decade, intense competition has led many technology firms to protect their inventions in court with a sort of evangelical fervor. The battle has played itself out in courtrooms around the world, in Silicon Valley and even in Orange County.

Software companies are becoming more active in enforcing their copyrights, even to the point of claiming that use of similar program menus and other graphical elements are infringements of their copyrights. Billions of dollars are at stake.

Computer makers are also more vigilant in ferreting out counterfeiters, who can steal sales and compromise a firm’s reputation for quality. Stephen H. LaCount, special counsel at the Newport Beach law firm of Stradling, Yocca, Carlson & Rauth, knows the phenomenon well.

LaCount, the former assistant general counsel and director of legal affairs at AST Research in Irvine, helped AST track down and prosecute a counterfeiting ring based in Hong Kong that was selling knock-offs of AST’s Premium 286 computers in China.

AST discovered the illegal clones in April, 1989, and filed a lawsuit in Hong Kong in October of that year. In November, 1990, the company finally won a court ruling ordering the counterfeiters to stop production and to pay court costs.

LaCount is serving as chairman of Orange County’s first big seminar on computer law, the 1991 Pacific Rim Computer Law Conference. The conference, sponsored by the Computer Law Assn., will be held Feb. 14-15 at the Four Seasons Hotel in Newport Beach.

In an interview with Times staff writer Dean Takahashi, LaCount discussed the issue of computer law and some noteworthy legal cases and trends in the field.

Q. What would you say were the most important legal decisions affecting technology companies during 1990?

A. Three 1990 decisions stand out. In the software copyright area, the decision by the federal district court in Boston in Lotus Development Corp. vs. Paperback Software International continued the trend to use copyright law to protect against copying of nonliteral elements of software programs (or those that do not duplicate a software program’s actual code but do copy unique program functions).

In the patent area, the U.S. Supreme Court’s decision in Eli Lilly & Co. vs. Medtronic Inc. extended the experimental use exception to patent infringement to include medical devices as well as drugs. In the biotechnology area, the California Supreme Court in Moore vs. the Regents of the University of California ruled that patients do not have any property interests in their surgically removed tissues or any products derived from their cells.

Q. How have you seen software protection in the United States evolve? Where is it heading?

A. During the 1980s, the scope of software protection expanded at a rapid pace. The first wave of cases led by Apple Computer Inc. focused on whether copyright protection extended to computer programs. The holdings in these cases firmly established that copyright protection extended to a computer program’s source and object codes. A second wave of cases has focused on whether copyright protection of a computer program should extend beyond a program’s literal source and object codes to such nonliteral elements as a program’s structure, sequence, organization and user interface. These so-called “look and feel” cases have dramatically expanded the frontiers of computer program copyright protection and generated considerable debate and controversy.

Q. Are we approaching anything resembling uniform protection of intellectual property rights?

A. In the software protection area, there has been very significant efforts toward approaching uniformity. Certainly, the United States has been on the leading edge of software copyright law precedents, which followed from the 1976 Copyrights Act. Many countries such as Australia and Canada have adopted laws and statutes that are similar to those in the United States. The U.S. government is also acting with many of its trade partners to achieve uniformity in software copyright law, and there are several trade-related international copyright negotiations as part of the GATT talks, which have focused on uniform worldwide software protection.

Q. Compatibility is the buzzword in the computer industry right now. How far can companies go in copying the technology of competitors without violating the law? Do you have some examples?

A. Reverse engineering and cloning a competitor’s computer technology is a complex and risky business. For example, to clone IBM’s PS/2 Micro Channel Architecture personal computers, a competitor would have to avoid infringing IBM copyrights (for certain technologies used in the computers).

Q. Let’s back up a bit. Can you describe reverse engineering and cloning?

A. Yes. Reverse engineering is the first step a company takes in creating a compatible product that targets a competitive product. It’s taking it apart, figuring out how the product works. It’s legal, acceptable and a common way of evaluating a compatible product. Cloning generally refers to the whole process of reverse-engineering a product and creating a compatible product.

Q. With recent political changes, I get the impression that U.S. companies can ship just about any technology to Eastern European countries. What’s the reality of the situation?

A. The reality is not quite as sweeping as you suggest. The U.S. and some of its allies have decontrolled most off-the-shelf personal computers, and accorded favorable licensing treatment for certain higher technology computers shipped to civilian end-users in Eastern Europe and the Soviet Union. However, the decision of Cocom, the international export control agency, in June to grant Eastern Europe greater access to leading-edge technology such as modern fiber optics equipment and some microwave telecommunications systems is limited to the countries of Czechoslovakia, Poland and Hungary, which have agreed to adopt safeguards against diversion to the Soviet Union.

Q. As software companies enter the Eastern European market, what advice can you give them about protecting their rights?

A. The intellectual property laws of the Eastern European countries are in transition and do not adequately protect software technology. Over the years, Hungary has been the most active in making commitments to international copyright protection standards, such as the 1922 Berne Convention and the 1971 Universal Copyright Convention. However, there is reason to be optimistic for the future. In 1990, the United States entered into trade agreements with Czechoslovakia and Poland under which these countries agreed to strengthen their laws in the areas of software copyrights, patents, licensing, trade secrets and integrated circuit layout designs. The protection in those two countries is not up to international standards, but my belief is there will be a gradual evolution where they will implement laws that adequately protect software.

Q. What do you expect to happen in Western Europe after 1992 with regard to software protection?

A. The European Economic Community directive on the legal protection of computer programs has generated intense debate and lobbying activity. While the EEC software directive has gone through a number of drafts to narrow the points of contention, two major issues still remain. One issue focuses on whether computer program user interfaces can be protected under copyright law. The other issue concerns the extent to which the software copyright owner may control or prohibit reverse engineering activities. Despite disagreements between the U.S. and the EEC on the scope of copyright protection, the anticipated implementation of the software directive will significantly benefit American software companies. In addition to its purpose to achieve harmonization of the software copyright laws of the member EEC countries, the directive confirms that the European Community considers copyright the appropriate right to protect computer programs.

Q. What kinds of things have to be weighed when selling technology overseas?

A. Perhaps most importantly, a company seeking to transfer technology overseas must first understand the international system for protecting intellectual property rights such as patents, copyrights, know-how and trademarks, as well as implement a comprehensive plan to protect its technology. Other considerations to be weighed include U.S. export controls on the transfer of technical data; antitrust and tax laws; the stage of development of the relevant market; the method of payment, and the objectives and motivations of the parties. A thorough analysis of these and other considerations will usually lead to a choice of the appropriate business form or arrangement.

Q. Ashton-Tate recently lost the copyright to its popular dBASE product because it allegedly developed the software with the help of outside resources. Can you describe the ruling as you understand it and its potential impact on the software industry?

A. This ruling by the federal district court in Los Angeles was a real shocker, and Ashton-Tate’s appeal will be closely watched by the software industry. In invalidating Ashton-Tate’s copyright and ordering the dismissal of the infringement lawsuit against Ashton-Tate’s competitor, Fox Software, the judge found that Ashton-Tate “knowingly” misled the U.S. Copyright Office by “repeatedly” failing to acknowledge that dBASE was derived from a public domain program developed by the Jet Propulsion Laboratory. This ruling does not weaken the legal basis for software copyright, but it may have a significant effect on the software industry if sustained. The penalty for deceiving the U.S. Copyright Office by failing to disclose previous works in a registration will be very severe indeed: invalidation of the copyright and conversion of the work into a public domain commodity that may be freely copied by competitors. It only applies to the United States. The judge hasn’t issued a final order and there will undoubtedly be an appeal. Many copyright lawyers are looking at this ruling as a fluke but it could be quite significant.

Q. You helped manage a case for AST in which the company’s computers were being counterfeited in China and Hong Kong. Describe that case and the action the company was able to take to stop it.

A. During my tenure as assistant general counsel at AST, the company uncovered a significant counterfeiting operation based in Hong Kong which was selling knockoff AST Premium 286 personal computers to customers in Hong Kong and China. AST took immediate action to stamp out the counterfeiters. The company purchased and reverse-engineered a number of the counterfeit computers and retained a specialized investigator to track down the source of the fake computers. The knockoff computer was so close in appearance to the genuine AST computer that the only reliable way to identify the fake was to take the cover off. Ultimately, it turned out that the bulk of the components were being supplied by a Hong Kong company and assembled by affiliated companies at factories located in various Chinese border provinces. While progress was at times frustratingly slow, a series of raids in China and a lawsuit filed in Hong Kong succeeded in derailing the counterfeit operation. The investigation spanned one and a half years. (AST won a ruling in November.)

Q. What is the state of software piracy overseas? What countries present the biggest problems?

A. Software piracy is a huge problem internationally. The PC software industry calculates that it loses $5.3 billion a year to illegal copies in Europe and several billion more in other international markets. In the United Kingdom, for example, software companies estimate that 60% of the software running on PCs is pirated; in Germany, 80% is pirated; and in Italy, 90% is pirated.

Q. How effective has the Business Software Alliance been in enforcing copyrights?

A. The Business Software Alliance, a Washington-based trade group formed by Lotus, Microsoft, Ashton-Tate, WordPerfect and other heavy hitters, focuses on combatting international piracy. Recently, the Business Software Alliance persuaded a Taiwanese prosecutor to indict a Taiwanese company for software piracy after investigators discovered that the company’s computer center was using pirated copies of 1-2-3 and dBASE III. In Europe, members of the group produced evidence of software piracy that led to a successful raid by Spanish police on a Madrid insurance company. Earlier this month, a group of U.S. software companies filed a barrage of copyright infringement suits against two French and British companies and favorably settled a number of earlier infringement suits brought against European companies. The Business Software Alliance has also been instrumental in persuading U.S. trade negotiators to push trading partners to enforce software copyrights.

Q. Individual computer users have long copied software packages from friends without much concern about getting caught. It’s extremely tempting. What is your advice to those people?

A. Clearly these individuals are infringing copyrights of the software publishers. Whether or not they will be caught is another question. However, many companies have implemented formal policies covering employees that state that only licensed copies of software may be used within the company environment. The software companies have become very vigilant and do review reports from former employees of software piracy within particular companies.

Q. Lotus Development Corp. vs. Paperback Software International, in which Lotus charged that Paperback violated copyrights on the 1-2-3 spreadsheet software, was an important decision and settlement this year. How has it extended the scope of software copyright protection beyond mere duplication of code?

A. The Lotus case continues a significant trend in the courts to use copyright law to protect against non-literal aspects of software programs, including the structure, sequence and organization of the programs and their user interfaces. Much of the debate and criticism involving this and other “look and feel” decisions has focused on their anticipated effect on competition in the software market. Clearly, the Lotus case inhibits the development of “work-alike” programs that adopt elements of the screen interface or other inventive user interface aspects of a competitor’s program. Some commentators have raised the specter of software companies acquiring impenetrable monopolies if they succeed in setting an industry standard interface. On the other hand, the copyright owners claim that they should be entitled to the commercial benefits that flow from superior skill, foresight and industry.