The Oklahoma Attorney General has brought a state law action against a Chinese manufacturer of valves used in the petroleum industry, alleging the manufacturer's use of pirated software has lowered its costs and thereby allowed the manufacturer unlawfully to undercut the prices of Oklahoma manufacturers of competing valves. The attorney general claims this conduct violates Oklahoma deceptive trade practices, antitrust, and unfair competition laws. This lawsuit is part of a trend for attorneys general in U.S. states to make novel use of state law causes of action to challenge conduct, even by foreign companies, that may harm local business.

Neway Valve Co. is China's largest valve manufacturing company and sells its products globally. Its customers include the U.S. energy majors, and 34% of its global revenue comes from sales to U.S. customers. Like other valve manufacturers, Neway relies heavily on computers to design and produce its products. The Oklahoma attorney general alleges in its lawsuit that a third party study determined that Neway's business operates many more computers than it has purchased software licenses. The lawsuit therefore alleges that, by using "pirated software" Neway has lower costs, allowing it to undercut the prices of U.S. competitors that make competing valves. The complaint gives examples of products made in Oklahoma that are priced higher than equivalent Neway products. The attorney general alleges Neway's cost advantage has harmed its Oklahoma rivals and thereby Oklahoma's economy, which relies heavily on oil & gas production.

Claiming violations of Oklahoma's deceptive trade practices, antitrust, and unfair competition laws, the attorney general asks the court to award treble damages, enter an injunction against the sale of Neway products in Oklahoma until Neway shows it is complying with licensing requirements, and appoint a trustee to monitor Neway's compliance.

It is no surprise to find a state attorney general acting to protect local businesses. What is novel in state enforcement actions like this is the use of antitrust and similar laws to challenge conduct that is several steps removed from competitive activities. This lawsuit uses Oklahoma competition laws against software piracy in China.

Local action

It has been uncommon for state governments to unilaterally bring antitrust enforcement suits for conduct that takes place abroad. This case involves conduct entirely at Neway's facilities in China. However, recently there have been other examples of state attorneys general using state laws prohibiting deception or unfair competition to challenge foreign software piracy that arguably harms local business. Last year Washington State, home to large Boeing operations, challenged a foreign aircraft manufacturer claimed to have violated unfair competition laws by using stolen software. Similarly, California has sued apparel manufacturers from China and India that allegedly did not pay licensing fees for software made by California-based Microsoft, Adobe, and Symantec.

The traditional docket of state attorneys general has included state lawsuits relating to local activity affecting local markets and also federal actions joined by states particularly affected. The states of California, New York, Pennsylvania, and Texas have been particularly active using their antitrust and other state laws. State enforcement actions often are characterized by allegations of how the challenged conduct affects local business and consumers. State actions often are resolved with remedies designed to fix the direct harms of the conduct, such as imposing commitments to limit price increases, in contrast to the structural remedies designed to restore competition generally that are favored by the federal agencies.

Implications

The Neway case shows how far state attorneys general can reach to challenge foreign conduct, even independent of the U.S. Justice Department and Federal Trade Commission. State enforcers are motivated by local concerns, if not protectionism, and will use whatever state law resources can be brought to bear against questionable conduct. The Oklahoma attorney general asserted that federal laws and international treaties simply do not address the deleterious effects of overseas software piracy on Oklahoma's economy. 

U.S. businesses may observe that they have been targeted for years by foreign officials, especially in developing countries, where law enforcement sometimes seem driven by protectionism. Nevertheless, these actions by U.S. states highlights the antitrust risks for foreign companies doing business in the U.S. that may harm local interests.