Microsoft, MBC and the Problem of Counterfeit Software

The Microsoft-MBC case over selling counterfeit software shows that it's not always easy for resellers to know if the goods they sell are strictly legal.

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 isnt 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.

"Its 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 doesnt 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 Courts 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.

/zimages/2/28571.gifClick 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 Microsofts 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 isnt sure about the origins of his distributors 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.