Lawsuits
In the late 1980s a dispute arose between SEA, maker of the ARC program, and PKWARE (Phil Katz Software). SEA sued Katz for trademark and copyright infringement. The most substantial evidence at trial was from an independent software expert appointed by the court to compare the two programs. He stated that PKARC was a derivative work of ARC, pointing out that comments in both programs were often identical, including spelling errors.
On August 2, 1988, the plaintiff and defendants announced a settlement of the lawsuit, which included a Confidential Cross-License Agreement under which SEA licensed PKWARE for all the ARC-compatible programs published by PKWARE during the period beginning with the first release of PKXARC in late 1985 through July 31, 1988, in return for an undisclosed payment. In the agreement, PKWARE paid SEA to obtain a license that allowed the distribution of PKWARE's ARC-compatible programs until January 31, 1989, after which PKWARE would not license, publish or distribute any ARC compatible programs or utilities that process ARC compatible files. In exchange, PKWARE licensed SEA to use its source code for PKWARE's ARC-compatible programs. PKWARE also agreed to cease any use of SEA's trademark 'ARC' and to change the names or marks used with PKWARE's programs to non-confusing designations. The remaining details of the agreement were sealed. In reaching the settlement, the defendants did not admit any fault or wrongdoing. The Wisconsin court order showed defendants was ordered to pay damages to plaintiff for defendants' acts of infringing Plaintiff's copyrights, trademark, and acts of unfair trade practices and unfair competition.
The leaked agreement document revealed under the settlement terms, the defendants had paid plaintiff $22,500 for past royalty payments, and $40,000 for expense reimbursements. In addition, defendants would pay plaintiff a royalty fee of 6.5% of all revenue received for ARC compatible programs on all orders received after the effective date of this Agreement, such revenue including any license fees or shareware registrations received after the expiration of the license, for ARC compatible programs. In exchange, plaintiff would also pay a commission in the amount of 6.5% of any license fees received by plaintiff from any licensee referred to plaintiff by defendants, whether before or after the license termination date.
After the lawsuit, PKWARE released one last version of his PKARC and PKXARC utilities under the new names "PKPAK" and "PKUNPAK", and from then on concentrated on developing the separate programs PKZIP and PKUNZIP, which were based on new and different file compression techniques. However, following the renaming, SEA filed a lawsuit against PKWARE for contempt, for continually using plaintiff's protected mark ARC, by turning ARC from noun into verb in the PKPAK manual. The US district court of the East District of Wisconsin ruled SEA's motion was denied, and the defendant was entitled to recover the legal cost of $500.
The SEA vs. PKWARE dispute quickly expanded into one of the largest controversies the BBS world ever saw. The suit by SEA angered many shareware users who perceived that SEA was a "large, faceless corporation" and Katz was "the little guy". In fact, at the time, both SEA and PKWARE were small home-based companies. However, the community largely sided with Katz because SEA was attempting to retroactively declare the ARC file format to be closed and proprietary. Katz received positive publicity by releasing the APPNOTE.TXT specification documenting the ZIP file format, and declaring that the ZIP file format would always be free for competing software to implement. The net result was that the ARC format quickly dropped out of common use as the predominant compression format that PC-BBSs used for their file archives, and after a brief period of competing formats, the ZIP format was adopted as the predominant standard.
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