On June 22, 2011, a new law will go into effect in Washington state that makes it an act of unfair competition for product manufacturers to use "stolen or misappropriated IT" in their business operations. As many product manufacturers are outside the jurisdiction of Washington state, the law also provides plaintiffs with a cause of action for damages from third parties that sell such products in Washington state and who have $50 million or more in annual sales and a direct contract with the manufacturer (Product Sellers). In addition, the law provides for an in rem action against certain of the offending products. The good news is that the law does provide several safe harbors for Product Sellers if they are able to satisfy one of the enumerated statutory affirmative defenses.
This law is first of its kind, although it may not be the last, as similar legislation has been introduced in several states and is strongly supported by Microsoft. Microsoft's primary goal through this and similar legislation is to prevent the use of pirated software abroad, particularly in China, by pressuring U.S. Product Sellers to cause their foreign suppliers to cease using pirated software. This new law should be carefully examined by those who manufacture, distribute, or sell products in Washington state and others should be mindful of similar laws that may be enacted in other states. This new law is quite complex. We provide a brief summary below, and a more detailed article is also available, discussing the new law and practical tips for product manufacturers and sellers.
Under the new law, the Washington Attorney General or a competitor injured by the sale of offending products, whether sold separately or as a component of another product, in Washington state can bring a claim of unfair competition. Importantly, the "stolen or misappropriated IT" need not actually be incorporated into a product sold in Washington state; the law provides for liability if a manufacturer uses "stolen or misappropriated IT" in its business operations, including in its inventory, logistics, or accounting systems. Further, an IT owner or exclusive licensee may not be able to bring an action unless it is an injured competitor.
Plaintiffs may seek to recover from a manufacturer the greater of actual direct damages or statutory damages equal to the retail price of the "stolen or misappropriated IT" used in a manufacturer's business operations. Treble damages are also available where the court determines that the use was willful, and costs and attorneys fees may also be awarded. Should the manufacturer lack sufficient assets in the state to satisfy any judgment, then an injunction may also be issued against the sale of offending products to which the manufacturer retains title. However, injunctive relief is limited in several ways: a private plaintiff is entitled to injunctive relief only if it has suffered "material competitive injury," and a Product Seller can avoid injunctive relief if it shows the offending product is an "essential component" of its own products.
If the manufacturer fails to appear or does not have sufficient assets to satisfy a judgment, a plaintiff may also join to an action a Product Seller of the manufacturer's offending products and seek damages of the lesser of the "retail price of the stolen or misappropriated IT" or $250,000, less any amounts recovered from the manufacturer. In such circumstances, the law also provides for in rem attachment of the offending products to which the manufacturer retains title.
Product Sellers can avoid a damages award and/or in rem or injunctive relief by establishing by a preponderance of the evidence that it satisfies one of the statutory affirmative defenses or, with respect to an attachment order, by posting a bond equal to the lesser of the retail price of the allegedly "stolen or misappropriated IT" or $25,000. For example, a Seller can establish one of the affirmative defenses by showing it has implemented a code of conduct or other written document governing the Product Seller's relationship with the manufacturer that includes commitments prohibiting the manufacturer's use of "stolen or misappropriated IT," and within 180 days of receiving written notice of the judgment against the manufacturer, directing the manufacturer to cease the theft or misappropriation.
For example, if a Chinese toy company who is manufacturing the year's most popular toy uses a pirated copy of Excel to track orders, shipments, or payments and those toys are supplied to a toy store in Washington state, then the Chinese company is in violation of the law and can be sued by the Washington Attorney General or by a seller of competing toys that are made without violating the law. Assuming the Chinese company does not appear in such suit, the distributors and retailers who contracted with the Chinese company to acquire the toys (such as through a purchase order) can be sued for up to $250,000 and the toys themselves could be held up in an in rem action. While the distributors and retailers can seek to establish one of the statutory affirmative defenses, their operations are nevertheless likely to be affected by interrupted or delayed receipt of needed product (e.g., due to issuance of an injunction or initiation of an in rem action against the toys), a potentially significant blow, particularly during the holiday season. Of course, the distributors and retailers will also likely incur legal fees to respond to any suit and establish a statutory affirmative defense, and if they fail to satisfy one of the statutory affirmative defenses, they may not receive the ordered toys, not recover prior payments made to the Chinese company and could have to pay up to $250,000.
Manufacturers and sellers of everything from automobiles to zippers and sporting goods to apparel are implicated. Several types of products, however, are excluded entirely from the law, including medical products regulated by the U.S. Food and Drug Administration, food and beverage products, restaurant services, and products subject to copyright or mask work protection.
As the law has yet to be interpreted or applied, future actions brought under the law should be monitored to determine whether the Washington Attorney General will take an active enforcement role and any court decisions should be closely reviewed to determine how the law will be interpreted and applied.