National Association of Attorneys General

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Pirates, Thieves, and Trolls

In 2010, the then co-chairs of NAAG’s Intellectual Property Committee, former Washington Attorney General Rob McKenna and Mississippi Attorney General (and current NAAG president) Jim Hood encouraged the National Attorneys General Training and Research Institute (NAGTRI) to apply for a grant from the U.S. Department of Justice to develop and deliver intellectual property (IP) theft training for state and local police and prosecutors. After we received the grant, we partnered with the National White Collar Crime Center (NW3C), which had received a similar grant, to develop the training. Since that time, together we have conducted 77 day-long trainings throughout the continental United States. By the end of the grant period, we estimate we will have presented this training to close to 2,500 police and prosecutors.

Although there are no exact metrics to measure the effectiveness of this outreach, we have noticed a marked increase of awareness, arrests, and prosecutions for IP theft at the state level as well as the passage of state laws that have increased penalties and addressed specific safety issues. This is particularly true in the case of counterfeit automobile airbags. Several states have recently passed laws that enhance penalties for this crime because their use exposes the driver and passengers to the risk of serious injury and death.

Those of us at NAGTRI who have been involved in the training have become increasingly passionate about the issue as we have delved more deeply into the economic and health and safety consequences of IP theft. Particularly eye opening to us was the huge impact and devastating potential consequences to our active duty military personnel with the vast number of counterfeit products that have been identified in the military supply system.1 The U.S. Department of Defense (DOD) recently issued a final regulation mandating certain requirements for suppliers of electronics to DOD.2 Under the regulation, DOD suppliers must obtain electronic parts that are in production or currently available in stock from the original manufacturer, dealers authorized by the original manufacturer, or from trusted suppliers. Hopefully, this will avoid what has happened in the past when counterfeit computer chips (some allegedly manufactured by the Chinese Army) were discovered in the DOD supply system.3 Other health and safety concerns include counterfeit makeup and perfume with high bacteria content, counterfeit medications, counterfeit dental supplies and surgical mesh, counterfeit automobile and bus brakes, counterfeit airplane parts, counterfeit toothpaste and other personal care items, and counterfeit baby food and formula. In fact, counterfeits have been found in other food and beverages as well: wine, cheese, honey, and olive oil are some of the products that have raised concern.

None of this is surprising to those who have followed the issue. However, perhaps one of the most potentially devastating fallouts from the number of counterfeit products on the market is the implications for our country’s—and each state’s—economy. According to the Global Intellectual Property Center of the U.S. Chamber of Commerce, intellectual property creates, either directly or indirectly, 55.7 million jobs for U.S. workers with 74 percent of our exports directly relating to IP.4 In 2010, the U.S. Department of Commerce placed the worth of intellectual property in this country at $5.06 trillion.5 One of the historical items of interest we talk about in the training is that, from the 14th through the 17th centuries, before the birth of modern-day Europe, rulers took the counterfeiting of products that formed the basis of the economy for a region very seriously. Penalties ranged from being placed in the stocks, to losing a hand, to death. In France today, the knowing purchaser of a counterfeit item is subject to criminal sanction.

The Association of Manufacturers commissioned a study from Harvard University to examine the economic consequences of only one small part of the counterfeit picture – software piracy. One of the key findings was that, from 2002-2012, software piracy cost manufacturers in the United States $2.39 billion in revenue, decreasing the U.S. GDP by $69.6 billion. During the same period, the U.S. manufacturing sector lost over 42,000 jobs due to software piracy.6

State attorneys general have not sat idly by when they have learned that foreign companies were unfairly competing against U.S. companies by using stolen software. In November 2011, 39 attorneys general sent a letter to the Federal Trade Commission (FTC) urging it to use its authority and resources to address the problem and noting that their own state laws could be used to tackle these issues.7

In 2010, Louisiana enacted a law making it illegal to sell products or offer services in Louisiana if they were developed or manufactured using stolen information technology, including software.8 A year later, Washington enacted the Misappropriated Information Technology Law.9 This law essentially revised the state’s existing unfair competition law to make it explicitly unlawful to offer for sale within Washington a product manufactured using stolen or misappropriated information technology. The law creates liability for direct manufacturers and third party retailers or distributors. Relying on the new law, then-Attorney General Rob McKenna wrote in fall 2012 to Brazilian company Embraer, the world’s fourth-largest aircraft manufacturer, about concerns that Embraer was using Microsoft software programs without the appropriate licenses. The issue was resolved without the filing of a civil case when Embraer assured current Washington Attorney General Bob Ferguson that it would compete fairly with other aircraft manufacturers by properly licensing the software.10

In October 2012, Massachusetts Attorney General Martha Coakley responded to the piracy threat, announcing that her office had reached an agreement with Thai fish processor Narong Seafood Company Ltd. that resolved allegations that Narong had violated the state’s prohibition on unfair competition. This allegation was based on the fact that Narong was using pirated software products in marketing its seafood. Narong agreed to no longer use unlicensed copyrighted software programs in connection with the production or manufacturing of goods entering Massachusetts and paid a $10,000 civil penalty.11

Shortly after that, in January 2013, California Attorney General Kamala Harris filed lawsuits against Indian and Chinese apparel manufacturers for using pirated software in producing clothing sold in California. According to the complaint, these companies had not pay licensing fees for software, including products manufactured by Adobe, Microsoft, Symantec and others, which had given them a significant cost advantage in the low-margin business of apparel manufacturing, shipment, and sales. The press release quoted Attorney General Harris as saying:

Companies across the globe should be on notice that they will be held accountable in California for stealing our intellectual property. This is an anticompetitive practice which harms our state’s economy and is illegal. These lawsuits go after overseas companies whose unlawful actions are eroding California’s garment industry and placing California companies who legally pay for computer software at a disadvantage.12

 

Like many of the states’ unfair competition law, the language of California’s law is general in nature: “As used in this chapter, unfair competition shall mean and include any unlawful, unfair or fraudulent business act of practice. . . .”13

Tennessee Attorney General Bob Cooper adopted a different approach when he discovered that Mould Mate Company, Ltd., a Thai manufacturer of forklift tires, was using pirated software to manufacture and market its goods. Without the cost of license fees, Mould Mate could price its goods lower, unfairly competing with Tennessee tire makers, conduct that potentially constitutes an “unfair or deceptive acts or practices affecting the conduct of any trade or commerce” in Tennessee.14 His office worked with the U.S. Ambassador to Thailand and the Thai Attorney General’s Office to facilitate a settlement between the owners of the software and the Thai company whereby all software license fees would be paid and an audit conducted to ensure compliance with both Thai and U.S. laws.15

In spring 2013, Louisiana Attorney General Buddy Caldwell threatened to sue Guangdon Canbo Electrical Appliance Co., Ltd., a Chinese company, under the 2010 Louisiana law, for using stolen business software in manufacturing Char-broil and Char-grill barbeque grills, in direct competition with Louisiana manufacturer Percy Guidry. Once Canbo received the letter threatening to ban their products from the state, the company agreed to fully legalize their software, paid over a quarter million dollars for the software, and agreed to an audit next year to ensure Canbo remains compliant.16

Just this year, Oklahoma Attorney General Scott Pruitt filed a lawsuit against a Chinese oil equipment supplier for selling equipment in Oklahoma that was manufactured using stolen software. The complaint alleged that Neway Valve Company stole manufacturing process related software used by several Oklahoma companies, including longtime oil equipment company, Kimray. The pirated technology was then used to sell its competing equipment in Oklahoma at a lower price than those of domestic companies. Oklahoma’s lawsuit seeks penalties and an injunction against Neway for creating an unfair market and violating Oklahoma’s Antitrust Reform Act and Oklahoma common law.17

When the theft of trade secrets in the form of stolen software and equipment to regulate the flow of electricity from wind turbines to electrical grids from American Superconductor, known as AMSC, cost that company $800 million, the federal government indicted Chinese company Sinovel Corporation and three individuals in the Western District of Wisconsin with one count each of conspiracy to commit trade secret theft, theft of trade secrets, and wire fraud.18 A handful of states have criminalized the theft of trade secrets, providing yet another avenue for a state to use to address the economic consequences to piracy.19 In other states, the computer crimes act might be used to prosecute those who steal or use pirated software.20

Patent Trolls

While protecting intellectual property in the United States is imperative for our economic future, some companies have been taking advantage of the very laws that protect IP by turning that protection upside down. These companies, labelled patent trolls or, less pejoratively, non-practicing entities (NPEs), purchase patents from other companies. The NPEs do not intend to use the patents for manufacturing purposes. Rather, the NPEs purchase the patents with the intent of pursuing other entities for infringing on the patents. In the worst case, such companies will blanket a state’s small businesses and non-profit organizations with letters demanding payment for alleged patent infringement. In an article last year in the NAAGazette, Vermont Attorney General Bill Sorrell and Nebraska Attorney General Jon Bruning described their states’ efforts against NPEs.21 Since that article appeared, a federal judge agreed with Vermont that the case against MPHJ Technology Investments should be returned to state court and heard there and the judgment was upheld on appeal.22

Both New York Attorney General Schneiderman and Minnesota Attorney General Swanson have successfully settled lawsuits against NPE MPHJ. Under the New York agreement, MPHJ agreed that it would ensure that a targeted business is actually infringing on a patent before sending a letter and must thoroughly explain the basis of any patent infringement claim.23 Earlier, MPHJ had signed an agreement with Attorney General Swanson pledging that it would not further target Minnesota businesses by claiming that they were infringing on patent rights by using basic office equipment, namely office scanners, without notifying the AG office. It also agreed to pay a $50,000 penalty and refund any Minnesota businesses that had paid a licensing fee or penalty to MPHJ.24

Forty-two attorneys general urged the U.S. Senate to pass patent reform legislation in a letter sent in February 2014. Specifically, the attorneys general requested that Congress consider including four amendments to the bills currently before it: confirmation of state enforcement authority, clarification of state court jurisdiction over bad faith demand letters, transparency of patent holders that send demand letters, and patent litigation reform.25 Unfortunately, in May, Sen. Patrick Leahy, chairman of the Senate Judiciary Committee and sponsor of the Senate legislation, removed the bill from the committee’s agenda, citing the lack of bipartisan support.26

States, however, have moved ahead with their own legislation to protect businesses. Following Vermont’s lead, at press time, fifteen other states had adopted legislation to reign in patent trolls.27 This legislation targets bad faith demands by patentees. Some, like Louisiana’s, include such demands under its unfair and deceptive trade practices law.

The right of a patent holder to sue those who are infringing on a patent is fundamental to protection of intellectual property rights. However, the behavior of some NPEs is akin to legal blackmail with those receiving demand letters often willing to pay a so-called “license fee” because they know that defending a patent infringement suit might cost more than a million dollars. Many of these demand letters are like those sent to Minnesota businesses that involve software, such as scanners, that are already embedded in machines purchased commercially. The validity of these demands is severely suspect.

By finding solutions to counteract the actions of the pirates, thieves, and trolls among us, states, and state attorneys general offices, have once again demonstrated that former U.S. Supreme Court Justice Louis Brandeis was correct when he opined that a “state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”28



[1] The U.S. Senate’s Armed Services Committee conducted a year-long investigation into counterfeit electronic parts that had made their way into the DOD supply system. These included parts in Air Force military cargo planes, U.S. Navy anti-submarine helicopters and airplanes, and in Army thermal weapon sites. Senate Committee on Armed Services, 112th Cong., Inquiry Into Counterfeit Electronic Parts in the Department of Defense Supply Chain.

[2] 79 Fed. Reg. 26,092. (May 6, 2014).

[3] See, e.g., Press Release, Department of Justice, Massachusetts Man Pleads Guilty to Importing and Selling Counterfeit Integrated Circuits from China and Hong Kong (June 3, 2014), http://www.justice.gov/opa/pr/2014/June/14-crm-595.html (last visited June 7, 2014), that details the sale of counterfeit integrated circuits from China and Hong Kong for installation in U.S. nuclear submarines. Some of them contained malicious computer code or hidden "back doors" that would allow someone to disable systems, intercept communications, and commit other computer network intrusions. Read more: http://www.digitaljournal.com/news/crime/counterfeit-semiconductors-case-draws-to-a-close/article/385905#ixzz33xx6DPQr (last visited July 21, 2014).

[4] IP Creates Jobs for America, http://www.theglobalipcenter.com/ip-creates-jobs-america/ (last visited June 7, 2014).

[5] Economic and Statistics Administration, Department of Commerce, Intellectual Property and the U.S. Economy (April 2012), http://www.esa.doc.gov/Reports/intellectual-property-and-us-economy-industries-focus (last visited July 21, 2014).

[6] William Kerr and Chat Moutray, Economic Impact of Global Software Theft on U.S. Manufacturing Competitiveness and Innovation (on file at NAAG). An example of the devastating consequences of this kind of piracy is the loss to AMSC from the alleged piracy of software by the Chinese company Sinovel. AMSC cut 460 jobs, closed plants, and lost customers. Sinovel is now under indictment by the federal government for the theft of AMSC’s trade secrets. Press Release, Department of Justice, Sinovel and Three Individuals Charged in Wisconsin (June 27, 2013), [7] See To: Federal Trade Commission Commissioners and the Director of the Bureau of Competition (Nov 4, 2011), http://www.naag.org/assets/files/pdf/signons/FTCA%20Enforcement%20Final.PDF (last visited June 7, 2014). Earlier in the year, 37 attorneys general sent a letter to Congress urging it to make the introduction and enactment of legislation to address rogue websites dealing in counterfeited and pirated goods a priority. See http://www.naag.org/assets/files/pdf/signons/20110511.signon.Intellectual_Property_Theft.pdf (last visited June 7, 2014).

[8] La. Rev. Stat. Ann. § 51:1427.

[9] Wash. Rev. Code § 19.330 et seq.

[10] See Press Release, Attorney General of Washington, Washington’s New Unfair Competition Law Protects Local Company from Software Piracy (April 3, 2013), http://www.atg.wa.gov/pressrelease.aspx?id=31143#.U5bhEWDD8dU (last visited June 11, 2014).

[11] See Press Release, Attorney General of Massachusetts, Company Fined for Using Pirated Software to Gain Unfair Advantage Over Massachusetts Business (Oct. 13, 2012) http://www.mass.gov/ago/news-and-updates/press-releases/2012/2012-10-18-narong-seafood-co.html (last visited July 21, 2014).

[12] Press Release, Attorney General of California, Attorney General Kamala D. Harris Files Unfair Competition Lawsuits over Use of Pirated Software in Apparel Industry (Jan. 23, 2013). http://oag.ca.gov/news/press-releases/attorney-general-kamala-d-harris-files-unfair-competition-lawsuits-over-use (last visited July 21, 2014).

[13] Cal. Bus. & Prof. Code § 17200.

[14] Tenn. Code Ann. § 47-18-104(a)).

[15] Telephone Interview with Victor J. Damon, Jr., Senior Counsel, Tennessee Attorney General’s Office (June 12, 2014).

[16] Press Release, Louisiana Attorney General’s Office, Louisiana Attorney General Leads Crackdown on Software Piracy (March 6, 2013), https://www.ag.state.la.us/Article.aspx?articleID=823&catID=2 (last visited June 8, 2014).

[17] Press Release, Oklahoma Attorney General’s Office, AG Pruitt Files Lawsuit against Chinese Company for Violating Antitrust Laws (March 3, 2014), https://www.oag.ok.gov/oagweb.nsf/3E67F1CEE13BC090862572B2005AD559/D1E1E31435C4FB5886257C9A005D61CE (last visited June 11, 2014).

[18] Press Release, U.S. Department of Justice, Sinovel corporation and Three Individuals Charged in Wisconsin with Theft of Amsc Trade Secrets (June 27, 2013), http://www.justice.gov/ope/pr/2013/June/13-crm-730.html (last visited June 11, 2014).

[19] See, e.g., Ala. Code § 13A-8-10.4 which criminalizes the theft of trademarks and trade secrets, classifying the penalty as a Class C felony.

[20] See, e.g., La. Rev. Stat. Ann § 14L73.1 et seq.

[21] Vermont and Nebraska Attorneys General Take Patent Trolls Head On, NAAGazette, October 2013, http://www.naag.org/volume-7-number-9-10.php (last visited June 11, 2014).

[22] State of Vermont v. MPHJ Technology Investments, LLC, No. 2014-1481 (Fed. Cir. Aug. 11, 2014).

[23] Press Release, New York Attorney General’s Office, A.G. Schneiderman Announces Groundbreaking Settlement with Abusive “Patent Troll” (Jan. 14, 2014, http://www.ag.ny.gov/press-release/ag-schneiderman-announces-groundbreaking-settlement-abusive-%E2%80%9Cpatent-troll%E2%80%9D (last visited June 11, 2014).

[24] Jennifer Bjorhus, Minnesota Targets East Coast “Patent Troll,” Star-Tribune, (March 11, 2013), http://www.startribune.com/local/196795991.html (last visited June 11, 2014).

[25] See To: The Honorable Pat Leahy, The Honorable John D. Rockefeller IV, The Honorable Chuck Grassley, The Honorable John Thune (Feb. 24, 2014), http://www.naag.org/assets/files/pdf/signons/Patent%20Trolling%20Legislation%20Final%20Sign%20On.pdf (last visited June 11, 2014).

[26] Edward Wyatt, Legislation to Protect Against “Patent Trolls” is Shelved, N.Y. Times, May 21, 2014, http://dealbook.nytimes.com/2014/06/09/competition-is-stiff-to-manage-tech-billions/?rref=business&module=Ribbon&version=context&region=Header&action=click&contentCollection=Business%20Day&pgtype=article (last visited June 11, 2014).

[27] Alabama (S.B. 121), Georgia (H.B. 809), Idaho (S.B. 1354), Louisiana (S.B. 255), Maine (S.P. 654), Maryland (S.B. 585), Missouri (H.B. 1374), New Hampshire (S.B. 303), Oklahoma (H.B. 2837), Oregon (S.B. 1540), South Dakota (S.B. 143), Tennessee (H.B. 2117), Utah (H.B. 117), Virginia (H.B. 375), and Wisconsin (S.B. 498). Illinois S.B. 3405 was awaiting the Governor’s signature.

[28] New State Ice Co. v. Liebmann, 285 U.S. 262 (1932).

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