An Act titled 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 generals representing 36 states and 3 territories of the Unites States wrote to the Federal Trade Commission, urging it to consider how unfair method of competition prohibition in Section 5 of the Federal Trade Commission Act can be brought to bear on the problem targeted by the said act of Washington 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 Washington.

There are several important concepts under the act. The first one is "stolen or misappropriated" IT, which 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 IT to support in any way the design, manufacture, distribution, marketing, or sales of products.

Generally speaking, using stolen or misappropriated IT infringes upon such Intellectual Property rights as copyright or trademark right embodied by the IT. However, this act is not aimed at strengthening the protection of those rights, but 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 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 stolen IT; and (ii) their articles or products were not manufactured using stolen IT.

There is a "notice" requirement for filing such actions. 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 must: (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.

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. A court may award as much as three times the damages normally allowed when it finds that the defendant has willfully used stolen IT. A court may also award costs and reasonable attorneys' fees to the prevailing plaintiff in all actions. 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 for filing such actions.

What are the effects of this act on the manufacturing industry of China? USA is the largest trade partner of China. Large quantities of products made in China have been sold around US after landing in Washington. The effects of this act upon the manufacturing industry of China mainly include: (i) 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. The third party who sells or offers to sell products manufactured with stolen IT may 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 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. Costs for software are necessary for business operation. Using pirated software seems to have saved costs, but it might increase legal risks in the long run. (ii) Improving the abilities of utilizing intellectual property, and strengthening the management of such assets as software. Lots of IT products will be used in business operation. Manufacturing enterprises should cultivate the abilities of utilizing intellectual property of their employees, as well as the abilities of differentiating lawful software from pirated ones. Besides, manufacturing enterprises should establish IT Administration System, 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 suits filed against the manufactures and the third parties, which provides opportunities for the manufacturing enterprises to rectify themselves. The manufacturing enterprises should make full use of those provisions and adopt practical and flexible measures in handling international disputes. To maintain normal businesses relationship and goodwill, enterprises of China without representing offices or assets in the State of Washington should actively protect their trade partners, and get rid of the threats of the third party liabilities under the act.