11.16.2011

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Updates

International software piracy is a serious economic problem that distorts competition and costs the United States billions of dollars in lost jobs and wages.  In October 2011, 39 state attorneys general (“AG”) signaled a commitment to take intellectual technology piracy, including software piracy, seriously by writing a letter to the Federal Trade Commission (“FTC”), announcing a plan to use state laws to prosecute manufacturers who use stolen intellectual technology (“IT”) to engage in illegal anticompetitive behavior.  The letter also asked the FTC to use its authority and resources to take action against manufacturers using stolen IT to unfairly compete. 

Washington State Attorney General Robert McKenna, and North Carolina Attorney General Roy Cooper, led the initiative.  The AG letter points out that foreign companies that use pirated software are able to cut their costs substantially, thereby gaining a competitive advantage over their law-abiding U.S. counterparts.

The letter focused on two methods for combating the use of pirated software and curtailing its harmful effects on competition: (1) using so-called “Baby FTC” statutes modeled after Section 5 of the federal FTC Act, which prohibits unfair methods of competition in trade or commerce; and (2) using statutes that specifically target pirated IT use in manufacturing.

Background and Scope of the Problem

Over the past 10 years, the United States has lost more than 2 million manufacturing jobs, representing a loss of billions of dollars in manufacturing wages, to countries such as China, India, Mexico, and Russia.  The piracy rate in these countries exceeds 80% to 90%.  Foreign manufacturers using pirated software gain significant cost advantages through the savings they achieve by using stolen technology in business operations and manufacturing processes.  These illegal savings distort the competitive landscape and harm U.S. companies who pay for their IT and comply with relevant intellectual property and copyright laws.

Recognizing that the theft of IT is endemic in countries to which American manufacturing jobs have been transferred, state AGs have researched what effect such piracy has on law-abiding manufacturers doing business in the United States.  The findings are astounding.  Some of the most compelling examples of the economic losses to law-abiding manufacturers include:

  • A California-based apparel manufacturer that must compete with an Indian manufacturer that uses over $14 million in stolen software; and

  • A Washington-based paper mill that must compete with a Mexican paper manufacturer that uses over $10 million in stolen software.

These losses are felt not only by individual law-abiding manufacturers forced to compete on an uneven playing field, but also by local and national economies that cannot afford to lose more jobs and crucial sources of revenue.  Given the importance of the manufacturing sector to the U.S. economy, the long-term potential for harm in lost jobs and wages necessitates aggressive measures and creative solutions. 

Use of State Unfair Competition or So-Called “Baby FTC” Acts

At least 23 states have so-called “Baby FTC Acts.”  These statutes, modeled after Section 5 of the FTC Act, prohibit unfair methods of competition and unfair or deceptive acts or practices in trade or commerce.  Baby FTC Acts explicitly look to both the FTC and federal courts for guidance when determining what constitutes an unfair method of competition.  Although the term “unfair method of competition” is not explicitly defined by either the FTC Act or the Baby FTC Acts, two things about its meaning are clear.  First, unfair methods of competition are meant to address harm to competitors rather than consumers.  Second, Supreme Court precedent suggests conduct that violates public policy may constitute an unfair method of competition. 

Although recent enforcement actions by the FTC have focused on the areas of consumer protection and antitrust, precedent interpreting both the FTC and state Baby FTC Acts suggests that harm to competitors, rather than consumers, is essential to an analysis of what defines unfair competition.  See, e.g., Boggs v. Whitaker, Lipp & Helea, Inc., P.S., 56 Wn. App. 583, 586 (1990) (pointing out that “[t]he unfair competition condemned by [Washington’s Baby FTC Act] . . . . applies only to acts against competitors.”). 

A line of Supreme Court cases supports the proposition that business conduct offending the public interest and legal and fair competitive norms constitutes an unfair method of competition.  See, e.g., FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972) (unfair methods of competition include conduct violating “public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws”). 

IT theft is a type of competitive wrong that falls easily within the broad scope of the definition of unfair methods of competition that violate the public interest.  Therefore, several states are now looking to state Baby FTC Acts to combat such theft that damages competitors in the states who play by the rules as well as a state’s overall economy through job loss. 

Use of Statutes Specifically Designed to Combat the Use of Stolen Technology

In addition to using state Baby FTC Acts to prosecute pirated software use, the AG letter also announced a commitment to use state laws specifically designed to address the problem.  Washington’s Unfair Competition Act (“UCA”), which took effect in July 2011, is one such law specifically designed to combat the use of stolen IT as a method of unfair competition.  The Washington UCA makes it illegal to sell products manufactured by a company using unlicensed IT in its business in Washington State.  Significantly, the law provides for liability if a manufacturer uses stolen IT in its business operations, even where those business operations take place outside of the United States.  In other words, the stolen IT need not be incorporated into the product sold in the United States in order to trigger liability under the UCA.  The goal of the UCA is to eliminate any unfair competitive advantages, encourage respect for intellectual property rights, and, in the process, make Washington state a more attractive place to do business.  

Conclusion

The effects of IT piracy on individual companies, the manufacturing sector as a whole, and the U.S. economy are significant and detrimental.  Recognizing that action to stop IT piracy and its effects on competition is long overdue, state attorneys general have made clear their intent to prioritize the issue, make use of existing state laws to prosecute illegal anticompetitive conduct, and commit resources and talent to formulating innovative solutions to the problem.  Thus far, the chief law enforcement officers of 39 states have committed to focus on the problem and have urged the FTC to use Section 5 of the FTC Act's prohibition on unfair methods of competition to do the same.  A partnership between state attorneys general and the FTC would commit unprecedented resources to the problem of international software piracy, send a clear message about the importance of respect for intellectual property rights, level the currently uneven competitive landscape, and potentially save the United States billions of dollars in manufacturing jobs and revenues.

© 2011 Perkins Coie LLP