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Why Is Microsoft Seeking New State Laws That Allow it to Sue Competitors For Piracy by Overseas Suppliers?
Thursday, March 24 2011 @ 09:46 AM EDT

Microsoft seems to be trying to get its own personal unfair competition laws passed state by state, so it can sue US companies who get parts from overseas companies who used pirated Microsoft software anywhere in their business. The laws allow Microsoft to block the US company from selling the finished product in the state and compel them to pay damages for what the overseas supplier did.

You heard me right. If a company overseas uses a pirated version of Excel, let's say, keeping track of how many parts it has shipped or whatever, and then sends some parts to General Motors or any large company to incorporate into the finished product, Microsoft can sue *not the overseas supplier* but General Motors, for unfair competition. So can the state's Attorney General. I kid you not. For piracy that was done by someone else, overseas. The product could be T shirts. It doesn't matter what it is, so long as it's manufactured with contributions from an overseas supplier, like in China, who didn't pay Microsoft for software that it uses somewhere in the business. It's the US company that has to pay damages, not the overseas supplier.

Awful, I know. But the real question is, Why? Why is Microsoft doing this? Does Microsoft need a new revenue stream, now that folks are switching to smartphones instead of PCs? Or is it something worse, something Machiavellian? I ask that because I noticed two things, one, that Microsoft said that it came up with the laws because it is dissatisfied with patent law and two, something odd and frankly alarming in the Washington State version of this bill that leads me to suspect that this is Microsoft's Plan B in its litigation storm against Linux -- its Ace in the hole in case the Supreme Court decides that its software is unpatentable.

Not that Microsoft would mind having more than one way to harass Linux and it competitors in general, or two revenue streams without having to actually work to make better products. I'd like to show you how Open Source is deliberately excluded, though, a deliberate carve out.

How can there be state copyright-related statutes without conflicting with US Copyright Law, which is federal? You may well ask. Some are already saying that they think the bills are unconstitutional, but not only has such a bill just passed the Senate and the House in Washington State, 90-4 natch, Louisiana passed such a bill already, the Unfair Trade Practices and Consumer Protection Law, which you can read about here. Microsoft tried and failed in Utah, so far, but similar bills are working their way through the state legislatures in Massachusetts, Kentucky, New York, Connecticut, Arizona, Illinois and Oregon. So what might Microsoft do with such a bill?

Let us analyze it by repeating. If a company overseas uses Microsoft's software, a pirated version, not in any step of the manufacturing process alone but anywhere in that business, and then sells the parts to a US company to become part of a larger product, the US company can be liable for damages, tripled if it was knowingly done and it can be blocked from selling the product in Washington State. The "victim" can sue in civil court and the Attorney General can go after the "wrongdoer" US company, if a notice is sent and no amelioration occurs. But if the violation is of an *open source license*, the victim can't sue anyone under the bill, and the Attorney General does nothing for you. It's an exception to the law.

Think Android, for example. Do you think there could be anticompetitive effects of such a law? Well. Fairness isn't exactly Microsoft's middle name. If you reread the Supreme Court's ruling in AT&T v. Microsoft, I think you can see at least some reasons why Microsoft might be unhappy with patent law. In that instance, it benefited them. But they have lawyers. I think they got more than they wanted, and they might be imagining how things might go if they were the plaintiff instead of the defendant. I'd rather not elaborate, in that I don't wish to teach Microsoft anything it doesn't already have in mind.

But getting back to the new law, while it is awful on its face, what makes it worse is that in the Washington State version that just passed both the House and the Senate and which is now being worked on to merge the two, if the violation is of an Open Source license, there is no recourse under the proposed law.

Here's the Senate report [PDF] on the bill in Washington State, which I've done as text, and which explains what those for and against the bill argued as to why it should or should not be passed, and I've red-text-ed the parts about Open Source, because it's long. Also, in purple you see the neat trick whereby no one can sue Microsoft over its software under this law. This report is, as it explains, not the bill but what legislative staff wrote up to explain it:

SENATE BILL REPORT SHB 1495

As Reported by Senate Committee On: Labor, Commerce & Consumer Protection, March 17, 2011

Title: An act relating to the unfair competition that occurs when stolen or misappropriated information technology is used to manufacture products sold or offered for sale in this state.

Brief Description: Regarding the unfair competition that occurs when stolen or misappropriated information technology is used to manufacture products sold or offered for sale in this state.

Sponsors: House Committee on Judiciary (originally sponsored by Representatives Eddy, Rodne, Kirby, Armstrong, Hunter, Hinkle, Chandler, Pettigrew, Carlyle, Springer, Maxwell, Anderson, Clibborn, Kelley and Kenney).

Brief History: Passed House: 2/22/11, 90-4. Committee Activity: Labor, Commerce & Consumer Protection: 3/14/11, 3/17/11 [DPA-WM, DNP, w/oRec].

SENATE COMMITTEE ON LABOR, COMMERCE & CONSUMER PROTECTION

Majority Report: Do pass as amended and be referred to Committee on Ways & Means. Signed by Senators Kohl-Welles, Chair; Conway, Vice Chair; King, Assistant Ranking
Minority Member; Keiser.

Minority Report: Do not pass.
Signed by Senator Kline.

Minority Report: That it be referred without recommendation.
Signed by Senator Holmquist Newbry, Ranking Minority Member.

Staff: Ingrid Mungia (phone)

Background: Consumer Protection Act. The state's Consumer Protection Act (CPA) prohibits unfair or deceptive acts or practices and unfair methods of competition in the conduct of trade or commerce that directly or indirectly affect the people of Washington. Several statutes specify practices that constitute unfair acts, but they do not provide an exhaustive list. A court may find that conduct not specifically enumerated in statute may constitute an unfair or deceptive act.

末末末末末末末末末末末

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

Senate Bill Report - 1 - SHB 1495


Either private plaintiffs or the Attorney General may bring civil actions to enjoin future violations of the CPA or to recover damages caused by an unfair act. Private plaintiffs may recover actual damages and costs, including reasonable attorneys' fees. Courts also may award private plaintiffs damages of as much as three times actual damages, in an amount not to exceed $25,000.

Personal vs. In Rem Jurisdiction. In order for a court to hear and determine a controversy, it must have jurisdiction over the matter. Often, courts have personal jurisdiction over a person sued in a civil lawsuit because the person made certain minimum contacts with the state; for purposes of the CPA, this includes transacting business within Washington.

Foreign defendants whose actions give rise to a lawsuit in a Washington court but who have never visited the state and who have no assets within Washington might not be subject to personal jurisdiction. Yet state courts may have jurisdiction to enter judgment regarding property located within the state, even if the courts do not have personal jurisdiction over that defendant. Such actions against property are called proceedings in rem.

Intellectual Property. Federal and state laws protect certain intellectual property rights in creations, such as computer software (programs) and hardware (equipment). A federal copyright gives the owner of an original work that expresses ideas, such as certain software, exclusive rights to copy, distribute, and adapt the work. A federal patent may protect a publicly disclosed computer-related invention for a period of time. Federal and state trade secret laws prohibit misappropriation of trade secrets, such as formulas, programs, and techniques.

Some holders of software copyrights license other people to modify and redistribute source code for those programs for free. Such programs commonly are called open source software.

Summary of Bill: The bill as referred to committee not considered. Summary of Bill (Recommended Amendments): 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 businesses that engage in these unfair acts.

Stolen or misappropriated IT is defined as hardware or software that a person acquired, appropriated, or used unlawfully, unless the hardware or software was not available for stand-alone retail purchase at or before the time it was stolen. Using information technology in business operations means using IT to design, manufacture, distribution, marketing, or sales of products.

Notice. Before an injured plaintiff can file suit, the owners of stolen IT must provide written notice to the party allegedly using the stolen IT giving the party the opportunity to prove it is not using stolen IT or 90 days to stop using it or begin legalizing or replacing the stolen IT they are using, subject to any extensions approved by the owner or the court. The notice must state (1) the identity of the IT; (2) the identity of the lawful owner; (3) the identity of

Senate Bill Report - 2 - SHB 1495


the applicable law being violated; (4) the manner in which the IT is being used, if known; (5) the products related to the stolen IT; and (6) the basis and evidence supporting the allegation.

Jurisdiction. A court may proceed in rem against certain products only if a court is unable to obtain personal jurisdiction over a party who violated the act.

Elements of a Claim. A person is injured by the sale of a product if the person establishes by a preponderance of the evidence that:

  • the person manufactures articles or products sold or offered for sale in Washington in competition with articles or products made using stolen IT;
  • the person's articles or products were not manufactured using stolen IT;
  • the person suffered economic harm, which may be shown by evidence that the retail price of the stolen IT was $20,000 or more; and
  • the person is proceeding in rem or seeks injunctive relief, that they have suffered a material competitive injury.
Remedies Against Manufacturers. If the use of stolen IT continues despite the required notice, an injured person or the Attorney General may bring an action to enjoin violations of the act's provisions, including ordering a person not to sell products in Washington. A plaintiff also may seek the greater of actual damages or the amount of the retail price of the stolen IT. The court may triple the damages if the defendant willfully used stolen IT. A court may award costs and reasonable attorneys' fees to the prevailing party for all litigation expenses incurred in actions brought by an injured person.

Remedies Against Third Parties. The plaintiff may add to the action a claim for actual damages against a third party who sells the products made with stolen IT, but only if a court has first entered judgment against the person using stolen IT. Damages may be imposed against a third party only if certain conditions are met, including the requirement that the third party received 90-days notice before entry of the judgment and the person who was found to have used stolen IT either did not appear in court or has insufficient attachable assets to satisfy the judgment.

Damages against a third party are limited to the lesser of $250,000 or the retail price of the stolen IT, minus any amounts recovered from the person using stolen IT. The court may award attorneys' fees to a third party who qualifies for an affirmative defense if the third party notified the plaintiff of the affirmative defense prior to being added to the action.

A court may not enforce an award of damages against a third party for a period of 18 months from the effective date of the bill.

The bill creates remedies exclusive of the Consumer Protection Act.

Stay and Dismissal of Proceedings. The court must dismiss an action against a person using stolen IT or a third party if the person or third party has been subject to a final judgment, or has entered into a final settlement, in a proceeding in any federal or state court arising out of the same theft. If the person or third party is subject to a pending action in a federal or other state court, the court must stay the action pending resolution of the prior action.

Senate Bill Report - 3 - SHB 1495


Exceptions. A person may not sue under this cause of action when:

1. the end product sold or offered for sale in Washington is:
a. a copyrightable work under the United States Copyright Act;

b. merchandise manufactured by or on behalf of a copyright owner and that displays a component or copyrightable element of a copyrighted work;

c. merchandise manufactured by or on behalf of a copyright owner or trademark owner and that displays a component or copyrightable elements relating to a theme park or theme park attraction; or

d. packaging or promotional material for such copyrightable works or merchandise.

2. the allegation that the IT is stolen is based on a claim that the IT infringes on patents or trade secrets;

3. the allegation that the IT is stolen is based on a claim that the use of the IT violates the terms of an open source software license; or

4. the allegation that a person aided, facilitated, or otherwise assisted someone else to acquire or use stolen IT.

Affirmative Defense for Third Parties. A court may not award damages against a third party if the third party establishes that:
  • it is the end consumer of a product or acquired the product after its sale to an end consumer;
  • it is a business with annual revenues of less than $50 million;
  • it acquired the products in reliance on either a code of conduct that governs the commercial relationship with the manufacturer or in general undertook commercially reasonably efforts to implement a code of conduct with its manufacturer regarding the use of stolen IT; or
  • it does not have a contractual relationship with the manufacturer that stole the IT.
EFFECT OF CHANGES MADE BY LABOR, COMMERCE & CONSUMER PROTECTION COMMITTEE
(Recommended Amendments as Passed Committee): Includes in the definition of copyrightable end product, mask works protections as specified in the United States Code. Clarifies the written notice provided to a third party alleging the use of stolen IT must be properly served to a third party痴 agent for service of process. Clarifies in an action brought by a private plaintiff, a court may award costs and reasonable attorneys fees to a third party for all litigation expenses, including without limitation, discovery expenses, incurred by a party that prevails when a person either manufactured the final product or produced a component equal to 30 percent or more of the value of the final product. Restructures Section 8 for clarity.

Appropriation: None.

Fiscal Note: Available.

Committee/Commission/Task Force Created: No.

Effective Date: Ninety days after adjournment of session in which bill is passed.

Senate Bill Report - 4 - SHB 1495


Staff Summary of Public Testimony on Proposed Amendments as Heard in Committee:
PRO: This bill will help many companies which are in the business of developing information technology that is used in the manufacturing of goods worldwide. While many companies purchase their back office software, there are some manufacturers that do not purchase their back office software. We have not been able to contain the misappropriation of property when it is used in manufacturing. International law has failed us and we have a duty to protect the information technology of American companies. This is an important piece of legislation that will give the technology industry the ability to keep growing and provide jobs. The problem of piracy has been an impractical one. This bill will provide an important tool to address the unfair competition and level the playing field by providing a cause of action by the manufacturers playing by the rules against those that are not. It also provides various incentives through notice and cure provisions to correct the problem before litigation. This bill will level the playing field. The latest amendments address the concerns of various companies. We have broadened the safe harbor provisions and added protection against multiple litigation by strengthening the notice provisions and opportunity to cure. This bill has a number of safe harbor defenses to address the concerns. This cannot be enforced without a notice and opportunity to cure the problem. Software piracy hurts economic growth and limits jobs. Intellectual property has to be protected. It is not unusual for the Legislature to regulate intellectual property rights. Without protections like these in the bill, there are no incentives for companies to produce products.

CON: This bill does not accomplish its intended goal and will tie businesses up in litigation. Software compliance is difficult and complex. This bill is flawed because it includes many provisions that are broad and undefined and will lead to unintended consequences. This bill will discourage competition in this state. The Retail Association wants to work on this issue during the interim and ask Congress to work on this issue at a national level. This bill will not help curb the piracy of software products because legitimate retailers do not want to buy pirated products. There are already national laws that address this issue. Most legitimate retailers will have representations and warranties in their sale agreements which require a vendor to sell products that do not violate any laws. Retailers do not want to be the policing force for another company that they believe is using pirated software internationally. There should be an absolute defense written into the legislation. Protections of brands is a high priority for General Motors. Motor vehicle manufacturing is a complex process and complex supply chain. We are concerned that the provisions in the bill could interrupt the supply chain and interrupt the timely delivery of vehicles to dealers. The extra territorial effect in the bill leads to concerns about the bill's constitutionality.

Persons Testifying: PRO: Representative Eddy, prime sponsor; Nancy Anderson, Microsoft; Lew McMurran, Washington Technology Industry Association; TK Bentler, Motion Picture Association of America.

Senate Bill Report - 5 - SHB 1495


CON: Jim Halstrom, IBM; Rene Albury, Software Information Industry Association; Mark Johnson, Washington Retail Association; Cliff Webster, General Motors.
Is that not peculiar? See what I mean about Open Source? Monopolies get to thinking everything should benefit only them, of course, and a fair and even playing field is the last thing they are after, no matter what the proponents said. It isn't fair to Open Source. Look at the wording, the definition of Open Source. They are pretending that there's no money in Open Source, that it's just given away, but Red Hat, I assure you, does not give its software away to businesses who wish to contract with them. And if there is a violation of the GPL, the license that comes with Linux, it would indeed do harm, monetary harm, to the company. But for Red Hat, there is no relief under this law. Only Microsoft can harass its competitors, who must, under this law, stand still and take it, I gather.

As to the argument I've seen Microsoft offer that this will get the attention of the overseas infringers and they'll shape up in no time, I find that a little laughable. It's the US company that pays, not them. And the booming market currently isn't the US. It's China. Do you really think they'll care?

Meanwhile, back in the US, Microsoft will be able to tie up competitors with civil litigation in Washington State, blocking them from selling in the state while the litigation this bill authorizes proceeds -- and you know how long that can take from watching the SCO saga -- but a company that sees Microsoft's overseas partners violating the GPL or the Apache license, for example, can't sue Microsoft under this new law. Talk about unfair competition. It's a law that benefits only Microsoft, while disadvantaging its chief competition.

Some oppose the bill in Washington saying it will harm businesses and that it's not Constitutional. Jan Teague, Pres. & CEO, Washington Retail Association, wrote an article in Seattle PI last week, saying so:

Bills sponsored on Microsoft痴 behalf would hold unsuspecting, law-abiding retailers liable for lawsuits if someone accused them of buying merchandise from suppliers who use pirated software. It would require large companies to establish expensive tracking to ensure their suppliers were not using illegal software.

Microsoft has introduced similar bills in several other states instead of going to Congress, a more efficient way to attack this problem than a varied and piecemeal state-to-state approach. Software piracy is, after all, an international problem that can稚 be solved by a random array of state bills.

Regardless, piracy is Microsoft痴 problem to solve as it has been trying to do for several years. It is a problem akin to what retailers call 都hrink, or the loss of income from merchandise stolen either by outsiders or employees. Unfortunately, shrink is a painful cost of doing business. But retailers no more would seek Microsoft痴 help with this problem than Microsoft should be asking retailers to help pay for solving its challenges with software piracy....

The bills under consideration are so sweeping in their scope they represent an invitation to a legal challenge on their constitutionality in light of federal copyright and trade authority. Even if this never became a U.S. constitutional debate, retailers are hardly capable of finding the means to assist Microsoft in becoming a worldwide police force to protect against software piracy.

Of course, Microsoft pushes the bills, saying they'll help create jobs in the US. Dell, Intel, IBM, General Motors, Wal-Mart, and HP disagree, among others, and the tech firms sent a joint letter to the WA legislators, which was ignored, I guess. "These bills would create a new and unjustified cause of action against many American employers, fueling business uncertainty, disrupting our supply chains and undermining the competitiveness of U.S. firms," the companies' letter said.

TechFlash has been covering this story too:

Microsoft wants a state law in Washington to allow it to sue companies that use pirated Microsoft products to manufacture products sold in Washington. The proposed law also would allow the state to seek legal action against companies, The Olympian reports. Two bills SB 5449 and HB 1495 have been passed. And now the House and Senate are trying to work out the differences.
Look how the House bill defines "use," though: "(b) Information technology is considered to be used in a person's business operations if the person uses the technology in the manufacture, distribution, marketing, or sales of the articles or products subject to section 2 of this act." So if a company has some allegedly pirated Microsoft software used to create an ad, for example, regarding a product, this bill would apply? Wow. Microsoft must really need money.

Here's how the bill was introduced in Utah by Microsoft, as "Protection Against Unfair Competition Through Misappropriated Technology Act/Microsoft Anti-Piracy Bill" (SB 201), and why it didn't pass, as described [PDF] by the Utah Food Industry/Utah Retail Merchants Association, which opposed the bill, in a 2011 legislative wrap up:

Microsoft made an attempt to run its model bill regarding the unauthorized use of its software overseas. As introduced, SB 201 would have placed significant and unreasonable burdens on retailers and manufacturers. Microsoft had this bill introduced during the closing days of the legislative session and attempted to push it through under the radar and without much discussion. The association engaged fully on the bill and was able to prevent its passage. The association continues to stand in favor of addressing software piracy in a responsible manner and without the draconian penalties and burdens that are contained within Microsoft痴 current model bill.
Here are the minutes from the initial step in the process, dated March 2, 2011. As you see, Microsoft deputy general counsel Nancy Anderson spoke, as did Jonathan Zuck, President of ACT. Against the bill were the Utah retail association folks and David Stewart for Verizon.

What else might Microsoft do with such a bill? Imagine if you will that it's really Microsoft behind the sale of Novell to Attachmate. They are for sure trying to buy the Novell patents, via the entity they organized for the purpose, and the two deals depend on each other, so is it a huge stretch to imagine that Microsoft is behind it? What might Microsoft do with those assets, whether directly or through a proxy?

Let's also imagine that Microsoft was the wind beneath SCO wings. We don't actually have to imagine that, since there was testimony by witnesses that it was the case.

Let's imagine further that Microsoft hates Google, Android, and Linux in particular and that it likes to see lawsuits brought against them so as to create a cloud of FUD over them, so Microsoft can sell competing products in the climate of manufactured fear, and also get a revenue stream from Linux companies, not just to aid Microsoft's bottom line directly but also to force Linux to cost more, so Microsoft can compete better.

No stretch there.

Finally, let's imagine that reality finally sank in and Microsoft realized that SCO was a loser against Novell, that Novell actually never did transfer the copyrights SCO was building its litigation lottery with. What if Microsoft and whoever else is the money behind SCO think Novell owns the copyrights to UNIX? Let's imagine they want them so they can continue the SCO strategy but in their own special way.

I don't think anybody much does own the UNIX copyrights, by the way, not even Novell, not on the fundamental UNIX code, for reasons I've covered in earlier articles, but in a nutshell because AT&T in the early days didn't apply for copyrights, back when the law said you had to if you wanted copyright protection. AT&T relied on trade secret instead.

But the SCOfolk have never been closely tied to tech reality, and they don't need to be if the real goal is FUD litigation, so let's imagine that the same wind beneath SCO's wings has transferred to Novell, or is trying to, and that is what is really behind the sale of SCO's software assets to unXis and the sale of Novell to Attachmate.

Now think about the laws Microsoft is lobbying to get passed. The law would make it possible for Microsoft to block Android sales in whatever state passed such laws if it could find some tie between the Android product and some manufacturer of a contracted part in China or wherever who happened to use a pirated version of Microsoft Word -- not to make the part but to write up an ad for it. Ephemeral, much? But can you imagine how much litigation could spring from a law like this? How little it would take to keep litigation in the air forevermore? And you don't have to even prove infringement in China, just allege it to initiate proceedings.

The law works with any proprietary software, though, not just Microsoft's. UNIX is proprietary software, is it not? So once unXis owns the UNIX software assets, it could sue anyone using UNIX "inappropriately" in their view under this law just like Microsoft can sue over pirated Word or Excel. Remember Wayne Gray's big dream of providing an operating system to compete with all current operating systems, a dream that meant he needed to try to get the UNIX trademarks?

I know. But it's no more far-fetched than what SCO did. If your goal is really FUD litigation, what do you care? How hard would it be to find someone using pirated software in China? Meanwhile, Motorola or Barnes & Noble might see a GPL violation in a Nokia-Microsoft phone and be unable to do a thing under the new Microsoft laws.

Of course it would work just as well to block sales of supercomputer hardware running GNU/Linux instead of Microsoft software. Microsoft is already behind a number of companies nipping at IBM's heels over high end computers, is it not? How handy would such a law be to tie up sales for years and years, so Microsoft could get folks to buy its own products instead in the interim?

In short, I see these new laws as FUD litigation manufacturing machines ironically called laws to prevent unfair competition.

Like I told you before, this is SCO II. And there's nothing fair about it.

Update: Here is a summary [PDF] of the Oregon proposed consumer protection bill, HB3315. It also excludes Open Source:

SECTION 2. (1) A person may not sell, offer for sale, lease, barter, trade or exchange a product that has been produced by the person using stolen or misappropriated information technology if another person is selling, offering for sale, leasing, bartering, trading or exchanging a similar product in this state that was produced without using stolen or misappropriated information technology. The prohibition in this subsection applies regardless of whether the product is sold, offered for sale, leased, bartered, traded or exchanged individually or as a component of another product.

(2) The prohibition in subsection (1) of this section does not apply to:...

(c) Claims based on violation of the terms of a license that allows licensed users to modify and redistribute source code associated with information technology free of charge;


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