Risk prevention relating to OEM and on-demand software
(Cheng Zhen, Lenovo China)
Updated: 2013-11-13

Software pre-installation (i.e. OEM software) has been a relatively mature business model in the industry. But with the development of network technology and diversification of services, software pre-installation, when inadvertently executed, might cause big trouble.

I. Pre-installation, on-demand installation and software piracy

OEM, as defined on Microsoft Website, “refers to software that comes installed when a customer purchases a new computer or a hard drive, etc., and the price thereof has been covered in the cost of the hardware. As the hardware vendors purchase directly from software vendors, OEM software can only be used along with the hardware and cannot be split for resale, or reinstalled on other hardware.” In other words, OEM is the licensed presale software installed or provided by manufacturers for end users (including individuals and commercial users).

In practice, however, software may also be pre-installed on demand of and tailored at the request of the users who supply the software. The business model is essentially an installation service rendered by hardware manufacturers at the request of users, and the author deems it is more appropriate to term it as “on-demand software.” The business model is rather complex, involving, in practice, vendors and service providers, and it is more likely to cause infringement disputes arising from infringement in the business model.

According to statistics from 2012 Report on China’s Software Piracy Rate, the piracy rate totaled 36% in terms of paid software, including 36% of information security software, 53% of office software, and 23% of operating systems software.

According to a survey conducted by Ipsos Public Affairs in January and February 2012 covering approximately 15,000 computer users in 33 countries, the average piracy rate hit 33% in the European areas with relatively benign IP protection environment, 60% in Asia Pacific, 62% in Central and Eastern Europe, and 61% in Latin America. It can be seen that it is indeed difficult for software right owners to achieve 100% licensed software usage. However, the widespread piracy has also left much room for rights owners to fight for their rights and interests.

Then, how should providers of OEM or on-demand software prevent risks of infringement and ensure business security? The author intends to briefly explore the following.

II. Risk prevention relating to OEM and on-demand software

1. OEM and on-demand software by hardware manufacturers

1) OEM Software by Hardware Manufacturers

According to Article 53 of the Copyright Law, a publisher or producer of a reproduction shall bear legal liability if the publisher or producer fails to prove that the publication or production thereof has been lawfully authorized. Article 28 of the Regulations of Computer Software Protection provides that a distributor of a reproduction, or a lessor of a reproduction of a cinematographic work, a work created by means similar to cinematography, computer software, a sound recording or visual recording shall bear legal liability if the distributor or lessor fails to prove that the reproduction distributed or leased thereby is lawfully sourced.

The key to OEM software, whether for individuals or commercial customers, is that a license should be obtained between the hardware manufacturer and the software owner for lawful authorization of the reproduction of the software; then a hardware or a medium with the software as a bundle is sold to the end user. In this business mode, the hardware manufacturer serves as a producer and sub-licensor of the software reproduction. In practice, the software owners generally will sign a software licensing agreement with the hardware manufactures to specify their respective rights and obligations. If the hardware manufacturer neglects to obtain authorization or fails to take full consideration at the time of signing the agreement, it will probably face infringement claims or administrative penalties from regulatory authorities. Therefore, the hardware manufacturer should consider acquiring at least the following rights before installing the software: (1) the right to pre-install software on its hardware products (with a specified list) or bundle copies of pre-installed software with its hardware products and resell them to end users; (2) necessary proprietary and servi c e warranties from software owners; and (3) adequate indemnification to cover liabilities and damages in case of software infringement.

2) On-demand installation of software by hardware producers

In direct sales, a hardware manufacturer frequently encounters demands from commercial users to install software for them, namely, the software provided by commercial u s e r s t o b e installed onto the hardware before sales. A question ensues, because the replication is carried out by the hardware manufacturer, does it mean that the hardware manufacturer has to obtain license from software owners?

The Copyright Law is silent in this regard, but Article 16 of Regulations of Computer Software Protection (the Regulations) provides that “lawful owners of software reproductions are entitled to the following rights to install the software onto a computer or devices with information processing capabilities according to needs of use; Article 30 of the Regulations provides that “No damages shall be available if holders of software reproductions do not know or do not have reason to know that the software is an infringing copy; however, injunctive relief may be available for enjoinment or destruction of the infringing copies etc.”

In the aforesaid Regulations, there are two concepts, namely, lawful owners of software reproductions and holders of software reproductions. Some scholars view the former as to mean entities, including individuals or legal persons, that purchase genuine copies from rights owners or their licensed distributors, accept donated copies or obtain license to use genuine copies. Obviously, commercial users act in the capacity. It is a legal right for commercial users to install the licensed software onto computers, as long as it is not prohibited or restricted by law and does n o t affect rights of others, and they will also have the right to entrust others.

Risk prevention relating to OEM and on-demand software

In this case, hardware manufacturers, on demand of end users, complete copying of the software, only temporarily controlling and holding software products in the capacity of holders of software copies.

Therefore, it is unnecessary (in most circumstances also impossible) for them to obtain authorization from software copyright owners. In line with the principle set forth by Article 30 of the Regulations, the criteria to determine infringement of holders of software copies lie in whether they subjectively know or should know the software they hold is an infringing product. Therefore, only if hardware manufacturers prove that they do not know and there are no reasonable grounds for them to know the software infringement, can they be exonerated from liabilities.

The author suggests that in practice a hardware manufacturer should: (a) exercise reasonable and prudent duty of care. For example, it may ask its staff, in negotiations, to demand rights certification (software copyright registration certificates or license documentation) from commercial users as a bargaining point; if commercial users can not provide foregoing proof, the hardware manufacturer should act with care and refuse to install; (b)while keeping rights certification recorded, the h a r d w a r e ma n u f a c t u r e should also require commercial users to produce necessary d o c u m e n t s o f rights guarantees or undertake in the sales contract that they guarantee the legitimate source of software products, seek solutions and bear liabilities in the event of infringement.

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