Alleged Software Piracy by Overseas Fashion Firms Gives Rise to Unfair Competition Claims in California

See People of the State of California v. Ningbo Beyond Home Textile Co., Ltd., No. BC499771 (Cal. Super. Ct. Jan. 24, 2013); People of the State of California v. Pratibha Syntex Ltd., No. BC499751 (Cal. Super. Ct. Jan. 24, 2013). The twin complaints seek, among other things, injunctions barring the defendants from distributing their products in the State of California until they can certify their compliance with the licensing requirements of all production-related software programs, as well as civil penalties of $2,500 for each violation of Section 17200 of the California Business and Professions Code and payment for the costs of the lawsuits.

According to the complaint, Ningbo Beyond Home Textile Co., Ltd. and its subsidiaries operate textile and apparel manufacturing companies in China and have shipped approximately 713,000 pounds of apparel products into California since 2010. Likewise, Pratibha Syntex Ltd. is an apparel manufacturing company located in India that has allegedly exported over 19,000 pounds of apparel products to California during the same period. The California Attorney General has accused these companies of using pirated copies of numerous computer software programs, including those offered by Adobe Systems, Inc., Microsoft, Inc., Symantec Corporation, and Corel Corporation, in connection with the manufacture of the defendants’ apparel products. Such software is allegedly used “in all facets of the apparel industry, including back-office support, product design, production, and production management,” and helps to create efficiencies for manufacturers. Given the razor-thin profit margins in the apparel industry, the defendants’ alleged piracy “enables them to save costs for a critical input … and thereby gain a substantial and unfair competitive advantage over their competitors in California who pay licensing fees for the software and information they use in their businesses.”

Counterfeiting and piracy is a major concern for the American apparel manufacturing industry, as law-abiding businesses spend substantial amounts of money to license the software that enables them to operate in a modern, technology-reliant economy. Not only do overseas companies obtain a short-term advantage over their US-based competitors by not paying license fees—that is, they can reallocate those savings to gain an edge in other facets of their business, be it hiring additional workers or financing research and development—but they also gain the long-term advantage of disincentivizing American companies from investing in the development of software that can further streamline apparel design, manufacturing, and delivery. Indeed, by undermining American companies’ return on investment in developing such software, “overseas apparel companies can stunt the development of such software by and for American apparel companies while investing in the development of such software for themselves.” Over time, the complaint asserts, a failure to prevent foreign companies from pirating software—and the corresponding loss of both short- and long-term competitive advantages for American manufacturers—could result in the permanent loss of jobs and manufacturing in the US, given the strong resulting incentives to downsize and relocate overseas.

Arent Fox will continue to monitor these cases, which indicate that state governments may now be prepared to take on what they consider to be unfairly traded imports—which generally fall within the domain of the federal government—through the use of novel and/or creative theories of liability. For more information, please contact the authors.