Imagine that your client owns a small business, Acme Manufacturing Company. As with most modern small businesses, its word processing and accounting records are computerized, as are the ordering, shipping and inventory information. They also have several computer-operated manufacturing and shipping machines.

 

Acme’s software was installed a few years ago. The software companies are no longer providing support for the software, since they have moved on to more updated versions. Now that the owner thinks about it, one of the companies might have even gone out of business. Even though the software companies are no longer providing support, the acme is not really concerned, since everything is running like it is supposed to (most of the time), and it has an in-house MIS person, Monica Jones, who somehow manages to hold everything together.

 

Acme’s owner has been reading a lot about the impending "Year 2000" crisis. A large proportion of software sold on the market had previously used only two digits to store years as electronic data. For example, 1998 would be read by the computer as 98. A person born in 1953, according to most computers, would be born in 53. The problem is that when the year 00 rolls around, the computer will think it is 1900 rather than 2000.

 

Software that correctly deals with the change in centuries is known as "Y2K compliant." Since Acme’s business is so dependent on computers, even though the owner has been afraid of what the answer will be, he finally asked Jones to check over the software to see if it is up to Y2K standards. After a few weeks, he gets the answer he was afraid of: None of it is.

 

At 12:01 a.m. on Jan. 1, 2000, if the computer doesn’t freeze up completely from being confused about the date, it will think that the shipments set to go out the following week are 100 years overdue. Similarly, the accounts receivable and accounts payable will be, according to the computer, 100 years overdue. George on the production line, ready to retire at the end of the month at age 65, isn’t going anywhere as far as the computer is concerned because he hasn’t been born yet. The client can’t afford to spend thousands of dollars for all new software, but also can’t afford to have its computers thinking they are in the middle of the Gilded Age at midnight on Dec. 31, 1999.

 

But Jones, who had always proven to be resourceful and imaginative, thinks there is a third alternative. From her review of the software, she thinks that she can correct the Y2K bugs herself by has modifying the software. All she needs to do, she thinks, is to reverse engineer the existing software, make a copy of the source code to see how the software operates, and upgrade the software herself.

 

This sounds rather complicated and technical, but from a financial perspective, the owner thinks it’s terrific. On the other hand, he has this vague recollection from his business law class that it is illegal to make copies of things and make new versions of someone else’s works. Jones’ "solution" might not be so good after all, since a copyright infringement suit might be even more expensive than the other alternatives. The client comes to you in a quandry -- what should he do.

 

Fortunately, there are two provisions in the Copyright Act that could allow Acme to upgrade its software without fear of liability. First, under appropriate circumstances it is a "fair use," under 17 U.S.C. 107, to reverse engineer or decompile software to learn about its functionality. Also, 17 U.S.C. 117 allows the owner of a copy of software to modify and upgrade the software that it will operate better on a particular computer.

 

Reverse Engineering as a ‘Fair Use’

 

Computer programmers write program code in a programming language such as Cobol, Basic or C. A programmer trained in a language can read it, understand it, fix it and modify it. However, a computer itself cannot understand source code, so it must therefore be compiled into object code. Generally, software is received by the customer/user only in object-code form, i.e., diskettes or a CD-ROM written in strings of 1’s or 0’s that are readable by the computer.

 

Obviously, to allow a programmer to evaluate the functionality of software in order to improve the software, the programmer would need to have a copy of the source code, which is probably not readily available. There are programs commercially available called "decompilers" or "disassemblers" which can translate object code back into source code so that it will be readable by a programmer. (1)

 

Strictly speaking, however, disassembling the object code into source code is a copyright infringement, since it results in making an unauthorized copy of the software. (2)

 

The courts have held, however, that reverse engineering software through disassembly, for purposes of studying the software’s functionality, is a fair use. (3) Such reverse engineering, to be a fair use, requires that copies of the source code be made only so a software analyst or programmer can study its functionality; that is, to discern the concepts or ideas underlying the computer code.

 

Protecting Expression

 

The reason behind the rule that making those copies is protected by the fair-use doctrine is that the Copyright Act protects only expression, not ideas. Many operational features of software are discernible only by reading the underlying code. In those instances, the only way for someone to understand the "ideas" contained in the underlying code is to decompile the code, thus making intermediate copies. (4)

 

There is not, however, a per se right to disassemble the object code. Disassembly is allowed only if there is no other way to understand the functionality of the software. If the functionality of the software is readily discernible on the computer screen, disassembly is improper. (5)

 

At the outset, the fair-use exception applies only if the individual doing the decompilation has an authorized copy of the software. (6) Reverse engineering a pirated copy of software would be copyright infringement. "Fair use presupposes ‘good faith’ and ‘fair dealing.’" (7) In addition, the intermediate copying must be used only to study the functionality of the software; if the final product also constitutes a copyright infringement, the infringement cannot be justified because the intermediate copying was allowed. (8)

 

Modifying and Adapting the Software

 

Assuming, then, that Acme can legitimately reverse engineer the software on its computer to generate a copy of the source code Jones can read, the next step is to legitimately modify the software so that it will operate properly when the turn of the millennium comes.

 

Section 117 of the Copyright Act allows the owner of a copy of software to modify and update his copy of the software, so long as the updated software is not sold to others:

 

"Notwithstanding the provisions of section 106, it is not an infringement for the owner of a copy of a computer program to make or authorize the making of another copy or adaptation of that computer program provided:

 

(1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner, or ...

 

Any exact copies prepared in accordance with the provisions of this section may be leased, sold, or otherwise transferred, along with the copy from which such copies were prepared, only as part of the lease, sale, or other transfer of all rights in the program. Adaptations so prepared may be transferred only with the authorization of the copyright owner."

 

Pursuant to sec. 117(1), a rightful owner of a copy of a computer program can make modifications to the computer program to facilitate the continuing use of the software in operating its business for internal purposes. (9) The first question, however, is who is the "owner" of the copy of the software? Unlike other copyrighted works, such as books, records, pictures, computer software is technically not "sold," it is "licensed." Thus, technically, the licensor is the true owner of each copy of the software.

 

Nonetheless, to determine whether the licensor/seller or licensee/buyer is the "owner" of a copy of software for purposes of sec. 117, you must look at the actual character of the transaction, rather than the labels used. (10) Although computer licensing transactions are generally considered to be sales of goods for purposes of applying Article Two of the Uniform Commercial Code, the fact that a software licensing transaction is considered to be a "sale" under the UCC does not make the transaction a "sale" as that term is commonly used, and thus automatically make the licensee the "owner" of the copy of the software for purposes of sec. 117. (11)

 

In the software context, if the "buyer" makes a single payment in return for perpetual use of the software, the transaction will be considered a sale, and the licensee will be the "owner" of the copy for purposes of sec. 117. On the other hand, if the licensee makes periodic payments and its right to use the software ends after a set period of time, or upon ceasing making payments, the transaction will be considered to be a lease or license, and the licensor rather than the licensee will be the "owner" of the copy for purposes of sec. 117. (12)

 

Since, in our example, Acme paid for its software up front, and its right to keep and use the software is perpetual, it would be considered to be the "owner" of the copy of the software under sec. 117. The next issue is what rights the "owner" of a copy of software has.

 

An owner’s right to modify the computer program includes the right to make adaptations of the program and add new features to his or her copy of the program. (13)

 

"The conversion of a program from one higher-level language to another to facilitate use would fall within this right [of adaptation], as would the right to add features to the program that were not present at the time of rightful acquisition. These rights would necessarily be more private in nature than the right to load a program by copying it and could only be exercised so long as they did not harm the interests of the copyright proprietor. Unlike the exact copies authorized as described above, this right of adaptation could not be conveyed to others along with the licensed or owned program without the express authorization of the owner of the copyright in the original work. The adaptor could not vend the adapted program, under the proposed revision of the new law, nor could it be sold as the original without the author’s permission. Again, it is likely that many transactions involving copies of programs are entered into with full awareness that users will modify their copies to suit their own needs, and this should be reflected in the law. The comparison of this practice to extensive marginal note-taking in a book is appropriate: note-taking is arguably the creation of a derivative work, but unless the note-taker tries to copy and vend the work, the copyright owner is unlikely to be very concerned. Should proprietors feel strongly that they do not want rightful possessors of copies of their programs to prepare adaptations, they could, of course, make such desires a contractual matter." (14)

 

Section 117 was intended to be read broadly. (15) Such a construction serves two important goals of the copyright laws;

 

"On the one hand, allowing sophisticated software users to enhance copies of copyrighted programs they have purchased eliminates the need to choose between either buying the latest version of a program or possibly infringing the program’s owner’s copyright. At the same time, allowing such enhancements to be used only in-house preserves the marked for improvements made by the copyright holder." (16)

 

In summary, Congress gave owners of a copy of software the right to modify or update the copy for their own use. If the software vendor wishes to prohibit or limit users from making such modifications, it must do so by contract. If the applicable agreement is silent, the software user is allowed to make its own modifications.

 

See Your License

 

Thus, Acme’s right to modify and update its software to comply with Y2K standards will depend upon its license agreements with the software suppliers. Unless the license agreement prohibits Acme from making its own modifications, sec. 117 gives it the right, if it is the "owner," to make such modifications for its own use, so long as they are only used in-house and not sold to others. If the license agreement prohibits Acme from making modifications, it is in a difficult position. It could ask permission from the licensor, which may or may not be forthcoming, or it could try to get the licensor to make the necessary upgrades, which Acme will obviously have to pay for.

 

If the licensor won’t agree to allow the upgrades to be made, or wants to charge an unfair price, Acme is in a more difficult position. There is an argument to be made that such a refusal would be a breach of the implied covenant in every contract that neither party will do anything which will injure the rights of the other to receive the fruits of the contract. (17) This is just an argument, however, which can only be won in litigation, which is what Acme doesn’t want.

 

The situation is not very different if the license agreement prohibits modification of the code and the licensor is out of business. In that case, there isn’t anyone to get permission from, nor is there anyone to do the work. On the other hand, there also probably isn’t anyone who will sue Acme for copyright infringement, either. The problem with taking your chances in that instance is that very often someone will appear out of the woodwork, like a former owner or a bankruptcy trustee, when there is a quick dollar to be made with a lawsuit. Thus hoping not to get caught at doing something wrong in that instance is just as much a crap shoot as in any other instance.

 

Subject to the client’s good faith, it is generally a fair use of copyrighted software to reverse engineer the software it lawfully obtained for the purpose of studying its functionality, and to create a copy of source code from object code through decompilation, so long as the created source code is used only for studying the functionality of the software. The Copyright Act also gives the owner of a copy of software the right to modify or upgrade its own copy of the software to run on its own computers. A licensor, however, can restrict by contract a licensee’s right to make such modifications.