The New Unfair Competition Act of the State of Washington and Its Effects on the Manufacturing Industry of China

By Zhang Guangliang, Associate Professor of Law School of Renmin University of China,[Unfair Competition]

An Act entitled, Sale of Products — Stolen or Misappropriated Information Technology, was enacted by the State of Washington (Washington) this year and became effective on July 22nd, 2011. Under this act, a business that manufactures a product while using stolen or misappropriated information technology (stolen IT) in its business operations engages in unfair competition when the product is sold in Washington, either separately or as a component of another product, in competition with a product made without use of stolen IT. A new cause of action allows private plaintiffs or the Attorney General to sue anyone who engages in this unfair competition, or to bring a claim against products made using stolen IT. The State of Louisiana also passed a similar act. And recently attorneys general representing 36 states and 3 territories of the Unites States wrote to the Federal Trade Commission (FTC). They are urging the FTC to consider how the penalties for unfair methods of competition prohibition in Section 5 of the Federal Trade Commission Act can be utilized and broadened to attack the issue of unfair competition at the federal level.
This act will have significant effects on the manufacturing industry of China, which should pay attention to the enforcement of this act and take appropriate measures to avoid the increased legal risks while exporting their products to any state where application of this penalty could affect cost, especially the State of Washington.
There are several important provisions under the act. The first one is “stolen or misappropriated” IT. This is defined as hardware or software that a person has acquired, appropriated, or used unlawfully. The second one is “using information technology in business operations,” which means using such IT in any way to support the design, manufacture, distribution, marketing, or sales of products.
Generally speaking, using stolen or misappropriated IT has narrowly been defined as infringing upon such intellectual property rights as the copyright or trademark rights embodied by the legal IT right holder. It has been limited in scope and seeks to expand beyond the traditional parameters in the final product itself and those who engage in the trade of those goods. However, this act is not aimed at strengthening the protection of application of that narrowly defined interpretation and traditionally viewed rights. It is now being pointed at protecting the rights and interests of those undertakings using lawful IT in their business operations by granting them the right to file unfair competition actions in the State of Washington, provided that they could establish by a preponderance of the evidence that: (i) they manufacture products sold or offered for sale in Washington in competition with articles or products made using the prohibited IT; and (ii) their articles or products were not manufactured using stolen IT. If they cannot meet this standard the case ends there. If the standard is met then it moves on to the notice stage.
There is a “notice” requirement for filing such actions which gives Chinese companies an opportunity to respond to false allegations. If a company from the State of Washington wishes to file a complaint, no court will even hear that complaint until the plaintiff has provided sufficient evidence. The plaintiff is required to provide the defendant the following: before an injured plaintiff files a suit, the owners of the stolen IT must provide written notice to the person allegedly using the stolen IT giving the person ninety days to stop using it, which is subject to any extensions approved by the owner. The notice is intended to ensure that companies that Washington State: (i) identify the stolen or misappropriated information technology; (ii) identify the lawful owner or exclusive licensee of the information technology; (iii) identify the applicable law the person is alleged to be violating and state that the notifier has a reasonable belief that the person has acquired, appropriated, or used the information technology in question without authorization of the owner of the information technology or the owner’s authorized licensee in violation of such applicable law; (iv) to the extent known by the notifier, state the manner in which the information technology is being used by the defendant; (v) state the articles or products to which the information technology relates; and (vi) specify the basis and the particular evidence upon which the notifier bases such an allegation. Once this phase has been completed the final stage is to determine the plaintiff is entitled to any remedy as a result of the defendant’s actions.
The remedies under this act are damages (including punitive damages) and injunctions. Actual direct damages or statutory damages of no more than the retail price of the stolen or misappropriated information technology may be imposed against those using the stolen IT in business operation. The highest penalty available under the law, reserved for those who acted with the highest degree of intent, a court may award as much as three times the damages normally allowed when it finds that the defendant has willfully (the highest standard of guilt) used stolen IT. A court may also award costs and reasonable attorneys’ fees to the prevailing plaintiff in all actions. The law provides lower penalties as well.
Not only the users of stolen IT but also a third party who sells or offers to sell in Washington products made by that person using stolen IT may be liable for damages under certain conditions. If a person found to have violated the act provisions lacks sufficient attachable assets in Washington, a court may enjoin the sale or offering for sale in Washington of any products made using stolen or misappropriated IT. It should also be noted that under the act here are certain exceptions; defenses available to Chinese producers, for filing such actions.
What are the effects of this act on the manufacturing industry of China? The USA is the largest trade partner of China. Large quantities of products made in China have been sold around the US after landing in Washington. The effects of this act upon the manufacturing industry of China mainly include: (i) The possibility of facing bigger intellectual property risks. As some manufacturing enterprises, especially the SMEs don’t have very strong awareness of intellectual property, believing that software piracy is something trivial; the carrying out of this act may cause the manufacturers of China to be sued in Washington by their competitors all over the world. There are some uncertainties on the liabilities of those enterprises, and litigation costs and the attorney fees will be a big burden for them; (ii) Facing bigger risks of losing customers and market shares.
Under the law, if any third party who sells or offers to sell products manufactured with stolen IT may also be sued. In order to be protected by the “Safe Harbor,” the third party will adopt supervising measures, require manufacturers to use lawful IT, and choose to terminate its relationship with them when believing that the manufactures have not adopted reasonable measures to solve the problems. The products of the manufactures will be enjoined from exporting into the USA, if they fail to pay the damages awarded by the court.
How should the manufacturers of China tackle this situation? In order to deal with the intellectual property risks and operational risks brought about by this act, the manufacturing industry of China can adopt the following measures: (i) Enhancing the awareness of intellectual property, and using lawful IT. Paying the costs for legally purchased software is necessary for business operations to be legitimate. Using pirated software may seem like it saves money up-front, but it might increase legal risks in the long run. (ii) Improving the ability to utilize intellectual property, and strengthening the management of such assets as software. A large amount of IT products will be used in business operations. Manufacturing enterprises should cultivate a culture of the obligation to utilize intellectual property in their employees, as well as the abilities to differentiating between lawful software from pirated ones. In addition, manufacturing enterprises should establish IT Administration Systems, to ensure that IT used in every link of production is lawfully authorized. (iii) Enhancing the ability to deal with international intellectual property disputes and to cope with this kind of cases in an appropriate way.
There are several limitations of how suits may be filed against the manufactures and the third parties, which provides opportunities for the manufacturing enterprises to rectify complaints. The manufacturing enterprises should make full use of those provisions and adopt practical and flexible measures in handling international disputes. To maintain normal businesses relationships and goodwill, enterprises of China without representing offices or assets in the State of Washington ,should actively protect their trade partners, and eliminate the threats of the third party liabilities under the act.

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