IT theft

  • September 27, 2012
    Guest Post

    By Eric Priest, Assistant Professor, University of Oregon School of Law

    China’s pervasive intellectual property piracy problem, and the resulting impact on American industry and jobs, is a constant refrain in U.S. media and even the presidential campaign.  But are some U.S. companies also benefitting from the infringement?  Some policy makers and software companies are beginning to ask whether U.S. businesses are actually indirect beneficiaries of pirated intellectual property in China (and elsewhere).  When an upstream producer such as a Chinese factory uses pirated software in its manufacturing or logistics operations, the cost of production is reduced.  Some of those savings can also be passed along to the U.S.-based firm that hired the factory, or to the retailer that sells the product.  These cost savings arguably give the overseas manufacturer and the seller of such a product in the U.S. an unfair edge over competitors in the U.S. market.

    Louisiana and Washington State passed laws in 2010 and 2011, respectively, that make it an act of unfair competition to sell a product manufactured using “stolen or misappropriated” information technology.  The Louisiana statute is terse and therefore broad, while the Washington statute contains detailed limitations on liability and requires that the defendant be given notice and have the opportunity to cure.  The Washington statute creates liability for the manufacturer as well as for certain third parties (i.e., sellers other than the manufacturer), although it limits potential third-party liability to large companies with over $50 million in annual revenue, which are better positioned to police suppliers.  

    In addition, Attorneys General from thirty-six states and three U.S. territories last November requested that the FTC consider using its broad unfair competition authority under § 5 of the FTC Act to pursue manufacturers who sell in the U.S. goods that they produced using pirated software in competition with law-abiding manufacturers.  In addition to such federal action, some state Attorneys General have indicated they would consider the possibility of using existing state unfair competition laws (the “mini-FTC Acts”) to the same effect.

  • August 16, 2012
    Guest Post

    By Stan Liebowitz, an economics professor at the University of Texas at Dallas

    Andrew Popper, in his insightful paper on problems and remedies of software theft, focuses on an aspect of theft that is not often considered. Instead of considering the theft of final consumer goods, he focuses on the theft of intermediate goods used in the production of other goods. The thieves in this case are companies, not individuals, and they produce products using stolen software, giving themselves an advantage over their more honest competitors.

    Theft is normally considered harmful to society for several reasons. Most importantly, if theft is allowed to become common, the linkage between effort and reward is weakened for law abiding citizens, thus reducing or eliminating incentives for individuals to provide the efforts to be productive. If the neighborhood thug is capable of taking all the fruits of your labors, you lose an incentive to labor. It is also the case that individuals and governments spend resources trying to reduce theft (so that individuals will have incentives to work) and these are resources that could have been used for other more productive purposes if not for theft.

    The economic model of competition provides clear predictions of how competition would work for firms within an industry when this type of theft is permitted. In the short run, the low cost producers (using pirated software) will earn higher profits than the high cost producers. In the longer run, the low cost producers will drive the high cost producers out of business.

    Normally, we want more efficient firms to drive out the less efficient firms because that lowers the cost of the product and lowers prices for consumers. There is another, probably more important reason to want the more efficient firms to prevail, although this is often left out of the simplistic economic models of competition. The expectation is that the current lower cost firms are generally the better and more capable firms, and thus as conditions change over time, the fitter firms are likely to better handle these changes. This is the same reason that sports teams try to pick the players with the best statistics — because the expectation is that the players who have been above average will stay above average during their productive careers.

  • July 30, 2012

    by Nicole Flatow

    Large-scale theft of information technology and intellectual property is becoming an increasingly serious problem for U.S. manufacturers competing in the global market, requiring new and better mechanisms for enforcement, according to a new ACS Issue Brief.

    In 2009, for every $100 worth of legitimate software sold, an additional $75 of unlicensed software “also made its way into the market.” And in 2010, the estimated value of stolen software spiked 14 percent.

    This rate of theft has a debilitating impact on businesses operating legally and seriously hampers competition, American University law professor Andrew F. Popper explains in his Issue Brief, “Beneficiaries of Misconduct: A Direct Approach to IT Theft.”

    “Companies profiting from stolen IT are not just free-riding on the successes of those who design and produce the products and ideas that drive the U.S. economy—they are destabilizing the pricing market and distorting lawful competition,” Popper writes.

    To tackle this problem, enforcement should directly address the harms this theft imposes on the competitive market through both state and federal unfair competition mechanisms, Popper asserts.