Beneficiaries of misconduct: a direct approach to IT theft.

Author:Popper, Andrew F.
Position:Information technology
  1. INTRODUCTION: THE IMPACT OF STOLEN IT ON COMPETITION II. ADDRESSING IT THEFT UNDER EXISTING LEGAL REGIMES A. Federal Trade Commission Act B. State Unfair Competition Laws C. National Trade Laws III. The Washington and Louisiana Statutes A. Notice and Opportunity to Cure B. Limited Monetary and Injunctive Relief C. Recourse Against Hiring Firms D. In Rem Proceedings IV. PRECEDENT FOR THE WASHINGTON STATUTE A. Enacting a State Statute to Address a Specific Method of Unfair Competition: Trade Secrets 1. Restatement of Torts, [section] 39 and the Uniform Trade Secret Act 2. Federalizing Trade Secret Law B. Dual-Track Enforcement by State Regulators and Private Attorneys General C. Gatekeeper Liability V. LEGAL AND ECONOMIC OBJECTIONS TO THE WASHINGTON STATUTE A. Preemption B. Fairness in Price Competition VI. CONCLUSION I. INTRODUCTION: THE IMPACT OF STOLEN IT ON COMPETITION

    Almost a century ago, the United States Supreme Court declared that the prohibition against unfair competition serves to protect fundamental values and important rights. "[T]he right to acquire property by honest labor or the conduct of a lawful business is as much entitled to protection as the right to guard property already acquired. It is this right that furnishes the basis of the jurisdiction ... of unfair competition." (1) The idea is simple: it is unfair to competitors and inconsistent with basic notions of market competition to allow market actors to steal the work or property of another and use that asset to obtain a competitive advantage over companies that play by the rules. (2) There are a number of settings, however, where current legal recourse is insufficient (3) to address such misconduct; particularly when the item taken is information technology (IT).

    The idea that a competitor can steal and benefit from the property of a rival or other company for commercial gain is at odds with basic notions of efficiency and fair play. (4) Professor Glen Robinson states the matter precisely: "Our concept of competition is based on a regime of exclusive property rights ... Competitors are supposed to compete with their own property, not with the assets of their competitors." (5) Robinson cites the "common law doctrine of 'unfair competition,' which prohibits firms from helping themselves to a competitor's property." (6) Although Robinson focuses on a company's theft of a competitor's property, the competitive harm is similar even where the stolen property belongs to a third party, since the recipient of the stolen property still obtains an advantage over its competitors by means of an illegal act. This is as true with IT as it is with any other valuable asset, and raises the basic question that is the focus of the research: What are the benefits and challenges of the legal remedies designed to address the significant problem of IT theft?

    One approach to IT theft might, in appropriate circumstances, be to consider such misconduct a form of unfair competition or an unfair trade practice. (7) In the common sense understanding of the phrase, such practices are misappropriations (8) that might not always be actionable under conventional intellectual property regimes, particularly when the misappropriation occurs outside the territory of the regulating jurisdiction. (9) Moreover, intellectual property laws are designed to protect intellectual property owners; for the most part, no redress is provided for third parties suffering an independent competitive harm. To be blunt, beneficiaries of the theft of IT secure an unjustified cost savings over their competitors and are unjustly enriched. (10)

    If a manufacturer steals software or other IT instead of paying for it, its input costs are reduced as compared to its competitors that pay for their IT. In cases where the company using stolen IT is a contract manufacturer, that cost advantage may accrue, at least in part, to the firm that hired the company to manufacture the goods on its behalf (i.e., the "hiring firm"). The result is an uneven playing field, rewarding theft and penalizing those who respect the rule of law and pay for their information technology and other key inputs.

    These indirect, yet undoubtedly damaging effects of IT theft have recently been the target of attention by numerous state attorneys general and state legislatures. Over the past two years, Washington State and Louisiana have enacted laws specifically designed to address the competitive harms arising from the use of stolen IT by manufacturers. These statutes, discussed in the body of the article, authorize the state's attorney general (and in the case of Washington, injured manufacturers) to obtain redress for competitive harms. (11) More recently, attorneys general from thirty-six states and three U.S. territories issued a letter urging the Federal Trade Commission (FTC) to attack this problem under [section] 5 of the Federal Trade Commission Act (FTCA), and commit to explore remedies within their respective state laws. (12) These developments signify a heightened awareness among lawmakers and law enforcement authorities of the close linkage between respect for property rights, fair competition, innovation, and economic growth in the global economy.

    The values at stake are significant. In recent years, the reduction of tariffs and dismantling of trade barriers created opportunities for businesses, but pressured manufacturers to become more productive, in part by forcing manufacturers to invest in sophisticated IT systems to increase profitability, with the hope that these expenditures will pay off through increased efficiencies.

    Where, however, firms steal IT in order to gain a cost advantage, merit-based success in the marketplace is at risk and the motivation to create better and more efficient goods and services is in jeopardy. As Professor Robinson notes, "[a]n incentives problem is created any time one firm is permitted to free-ride on a competitor's investments, whether those investments are represented by tangible assets or intellectual property." (13) That formulation captures many of the legal, competitive, and ethical problems considered in this Article. (14)

    Stolen IT is a global problem producing massive costs and other severe economic impacts. The estimated value of stolen software around the world in 2009 was $51.4 billion. (15) In 2010, it was $58.8 billion, a fourteen percent increase. (16) Moreover, "the global PC software piracy rate rose in 2009 to forty-three percent, up two percentage points over the previous year. This means that for every $100 worth of legitimate software sold in 2009, an additional seventy-five dollars worth of unlicensed software also made its way into the market." (17)

    Although a sizable amount of IT theft is the result of actions by criminal organizations, most is conventional unauthorized copying--piracy--by individuals and commercial entities. (18) In a survey conducted in emerging markets, fifty-one percent of the respondents (individuals and businesses) stated that they thought it was lawful to pirate or copy software. (19) Further compounding the problem is the fact that the rate of IT theft is highest in some of the same countries that today account for a large share of global manufacturing. (20) The National Association of Attorneys General notes that software piracy rates in some of America's largest trading partners exceeds eighty to ninety percent. (21)

    It has become evident that "[c]ompanies that do not pay for the [software] programs they use to run their operations have an unfair cost advantage over companies that do, which skews competition." (22) As the Organisation for Economic Co-operation and Development (OECD) report notes:

    Counterfeiting and piracy have economy-wide effects: (i) innovation is undermined, (ii) criminal networks gain financially, (iii) the environment is negatively affected, (iv) workers are worse off. Moreover, in countries where counterfeiting and piracy is widespread, (v) foreign direct investment may be lower and (vi) the structure of trade may be affected. (23)

    Rights holders experience: (i) lower sales volume and prices; (ii) damaged brand value and firm reputation; (iii) lower royalties, (iv) less incentive to invest in new products and processes, (v) higher costs, because of spending on efforts to combat counterfeiting and piracy, and (vi) potential reduction in the scope of their operations. (24)

    Consumers acquiring counterfeit or pirated products, whether knowingly or unknowingly, (i) may be exposed to elevated health and safety risks, and (ii) could experience lower consumer utility due to generally lower quality of infringing products. (25)

    Effects of counterfeiting and piracy on government come in the form of (i) lower tax revenues, (ii) the cost of anti-counterfeiting activities, including responding to public health and safety consequences and (iii) corruption. (26)

    While most studies on IT theft have focused on the direct harms to IT owners and to governments due to reduced private-sector investment and lower tax revenues, little attention has been paid to the indirect harms that IT theft may impose on competitors who incur the full costs of any IT they use. Often, these competitive harms are hidden by the fact that the victims have no idea that their competitors are breaking the law in order to gain a competitive edge.


    Given the economic impact of IT theft, including its potential impact on competition, it is worth exploring whether this problem can be addressed under existing legal regimes such as the FTCA, state unfair competition laws, and international trade law.

    1. Federal Trade Commission Act

      Section 5 of the FTCA gives the agency power to issue rules, publish guidelines, and initiate enforcement proceedings to address "unfair methods of competition" and "unfair or deceptive acts or practices." (27) The FTC should exercise that power to address IT theft...

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