IT compliance best way to gain an edge over rivals
Alan Chiu of Mayer Brown JSM discusses the new US anti-IT theft approach and what HK and mainland businesses can learn from this
US movement to prevent unfair competition from IT theft
In recent years, millions of local manufacturing jobs in the United States migrated to countries such as China, Mexico and Vietnam due to their lower operating costs. Use of pirated software, which gives an unfair advantage to those foreign manufacturers over local businesses that pay for licensed information technology, has been seen as an international trade issue concerning distortion of lawful competition rather than a simple copyright violation. It also constitutes a direct threat to the US economy.
At the state and federal levels, US government officials have begun to take action to ensure imports are produced by companies using licensed software. Most of those laws are existing legislation against unfair trade practices while Washington state and Louisiana enacted specific laws to deal with anti-IT theft unfair competition issues last year.
The moves to prevent unfair competition from IT theft has been amplified in recent months through high-profile support in the US House of Representatives, with the House small business committee urging the Federal Trade Commission to find solutions to prevent further job losses due to unfair competition and IT theft.
Landmark action against Narong Seafood in Massachusetts
On October 18, Massachusetts Attorney General Martha Coakley announced that she took action against a seafood processor called Narong Seafood in Thailand because it was undercutting Massachusetts counterparts by using pirated software to run its business. The case was settled amicably, with the Thai company acknowledging the unfair business practice and agreeing to stop using unlicensed software.
Narong Seafood responded promptly to the complaint and also agreed to pay a US$10,000 civil penalty to the state.
Given that the US market accounts for up to 70 per cent of Narong's exports, this may be why Narong resolved the dispute earlier in order to avoid disruption to its sale.
The Massachusetts settlement marks the first time an attorney general has exercised authority to stop a foreign company competing unfairly through unlicensed software use. The action could prompt similar cases in other states.
Lesson for Hong Kong and mainland businesses
China has consistently had a high rate of software piracy - 77 per cent according to a BSA Global Software Piracy Study published in May.
Chinese manufacturers are likely be closely scrutinised when US attorneys general seek to tackle IT piracy and protect American jobs.
Hong Kong and mainland manufacturers and exporters, especially for those that rely heavily on the US market, should learn from Narong Seafood's experience.
Use of unauthorised software in business will attract both civil and criminal liabilities, putting a commercial reputation at risk.
Here are some good practices for manufacturers to help avoid risks of sales interruption in the US and damage to reputation:
- implement a proper IT policy;
- keep a software inventory;
- conduct periodic software audits;
- review software needs and prepare software forecasts; and
- respond to alleged IT piracy complaints promptly.
Sourcing agents may also consider taking the following steps:
- implement a Supplier Code of Conduct which covers IT compliance and ask the contracted manufacturer to adhere to it;
- make inquiries with the manufacturer and obtain in advance a written assurance of use of licensed software;
- seek a full indemnity from the manufacturer to cover liabilities arising from the manufacturer's use of stolen IT; and
- act promptly to seek a written assurance or cause the manufacturer to cease using unauthorised software upon receiving complaint.
A smart approach is to take advantage of this new US direction and use IT compliance as a marketing edge over manufacturers in countries where software piracy is rampant, strengthening relations with US trade partners; to enhance global reputation and to expand market share.
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