The use of unauthorized software in business is illegal and is likely to attract both civil and criminal liabilities in Hong Kong. Yet, did you know that the use of unauthorized software by anyone whose goods are supplied to the US may also constitute an unfair trade practice under the US’s unfair competition laws, and may lead to the detention of goods, financial liability and injunctions against further sales? A Thai company has recently been fined for using pirated software to gain an unfair trade advantage in Massachusetts. The lessons that can be learnt by other Asian businesses from this very first case under the US’s new anti-IT theft approach are discussed below.

What is the software anti-piracy trend?

The use of unauthorized software provides business operators with a cost advantage over law-abiding businesses that pay for licensed IT. Different states in the US have now begun to take action under their respective unfair competition laws to ensure that imports are produced by companies using licensed software in their business operations. Most of those laws are existing legislations against unfair trade practices, while Washington state and Louisiana have each (in 2011) enacted new laws specifically to deal with anti-IT theft unfair competition issues.

In brief, the new Washington and Louisiana laws create a civil cause of action against manufacturers, whether local or foreign, that use unauthorized software in the course of their business operations, and which sell (or offer to sell) their products, or which have their products sold (or offered for sale) within Washington and Louisiana respectively. The overseas defendant manufacturers need not be subject to jurisdiction in the US as the court is empowered to enter judgment regarding property located within the state, seize the offending products, and order an injunction against further sales (or the offering for sale) of such products in the state.

The movement to prevent unfair competition from IT theft has been amplified in recent months through high-profile support in the US House of Representatives, as the House Small Business Committee urged the Federal Trade Commission to find solutions to prevent further job losses due to unfair competition and IT theft.

Thai company fined in Massachusetts

Massachusetts Attorney General (AG) Martha Coakley, on October 18, 2012, announced that she had taken action against a seafood processor called Narong Seafood Company Limited (Narong Seafood) in Thailand which was undercutting Massachusetts food processors by using pirated software to run its business. The case was settled amicably, with the Thai company, which was said to export 70% of its products to the US, acknowledging it had been engaging in an unfair business practice. Narong Seafood responded promptly to the complaint, agreed to stop using unlicensed software in connection with its production of goods that enter Massachusetts, and took immediate steps to ensure licensing compliance; it also agreed to pay a US$10,000 civil penalty to Massachusetts.

This settlement marks the first time an AG has exercised authority to stop a foreign company from competing unfairly through unlicensed software use. It is expected that the Massachusetts AG’s action may prompt similar actions in other states. It remains to be seen which companies will be targeted next, and how they will respond under the unfair competition laws of different states.

How can Asian businesses avoid similar risks?

Use of counterfeit software, corporate licence under-reporting, illegal downloading, softlifting (e.g., allowing multiple users to use single-licensed software in breach of the licence terms; or the use of home version software for business purposes, etc.) and OEM unbundling are issues that fall under the scope of software piracy in this context. Any business performing any of these acts will be perceived as having an unfair business advantage and risks being caught and dealt with under the new US anti-IT theft approach.

It is advisable for Asian businesses, especially those which rely heavily on the US market, to learn from Narong Seafood’s experience and to try to turn the new legal risk into a business edge, i.e. using “IT compliance” to gain a competitive advantage over manufacturers in countries where software piracy is rampant; to strengthen relations with US trade partners; to enhance global reputation and to expand market share. Asian manufacturers may consider conducting periodic software audits, keeping up-to-date software inventories and implementing proper IT policies to reduce the risk of being subjected to software piracy allegations. There will likely be growing demands from sourcing agents for manufacturers to provide written assurance of IT compliance. If an IT theft complaint is received, it is important to take it seriously and respond promptly, because a swift and positive response may help minimise the liability exposure.