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California Suit Targets China, India Apparel Makers

The claims focus on a new lever: the companies’ use of pirated, unlicensed software in conducting their business.

BEIJING — An innovative intellectual property rights lawsuit against garment makers in China and India is causing some consternation in the business here, with industry insiders and analysts wondering whether it is the start of a tough new trend.

On Jan. 24, California Attorney General Kamala D. Harris filed lawsuits against two large apparel companies — one in Ningbo, China, the other in India — over alleged unfair trade practices. Harris’ claims focus on a new lever: the companies’ use of pirated, unlicensed software in conducting their business. By not paying for properly licensed computer operating systems and critical software, the suit says, the companies built an unfair trade advantage over homegrown companies in California.

“Companies across the globe should be on notice that they will be held accountable in California for stealing our intellectual property,” Harris said.

“This is an anticompetitive practice which harms our state’s economy and is illegal,” she continued. “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.”

Specifically, the suit named Pratibha Syntex Ltd. of India and Ningbo Beyond Home Textile Co. Ltd., a large apparel maker in China with nearly 20,000 employees and a number of subsidiary companies that manufacture everything from children’s clothing to textiles for home furnishings. The California suit says paying the costs for legal software can make a real difference in a difficult industry. It says, since 2010, the Ningbo companies shipped 713,000 pounds of apparel products into California, while the Indian company imported 19,000 pounds into the state.

“When overseas companies pirate software used in apparel design, such as Adobe Photoshop or other back-office software, such as Microsoft Office, they obtain critical short-term advantage over their American competitors by not paying licensing fees to software developers,” the California suit says. “…overseas apparel companies thereby gain a substantial and unfair cost advantage in an industry characterized by very thin margins.”

Wang Rui, information technology director for Ningbo Beyond Fashion, said the company now uses legally licensed software across the board. Wang said Ningbo Beyond is in negotiations involving the suit, but he would not elaborate on details.

“We are trying to maintain communications,” he said.

 

But the case could have much wider implications in China, where pirated software is a matter of course. Although tech companies say the situation has improved somewhat in recent years, operating systems like Windows are routinely pirated and sold without license fees, along with all other types of computer software used in the course of doing business.

According to the Business Software Alliance, which tracks the piracy issue worldwide, China has come into greater compliance in recent years. In 2012, the alliance said 77 percent of software on personal computers was pirated, compared with an average of 42 percent worldwide. That’s an improvement over years past, when the rate was well above 90 percent.

Switching to legal software will be a pricy proposition for companies not in compliance, but analysts are warning that exporters must play by international rules or face similar lawsuits from the U.S.

Xiao Doama, a well-known IT analyst and blogger in China, said he believes the California case could have larger implications in China. Certainly, he said, it is something for companies here to watch.

“This is a big warning for this industry,” he said. “It’s hard to say whether other manufacturers in China will also be sued.”

But, he explained, this lawsuit has opened the door to that distinct possibility. In an essay on the case, Xiao noted that a Thai seafood importer was fined $10,000 last fall by Massachusetts in a similar case over the use of pirated software. In China, the scope of the problem and use of illegal software is likely much larger.

“Access to overseas markets…attach[es] great importance to the protection of intellectual property rights,” he wrote. “If you want to enter the international market, it is necessary to regulate your behavior, and respect the various aspects of intellectual property rights.”

Xiao Jiancheng, a manager with the Guangdong Home Textile Association, said there is a potential trend emerging, but companies are aware and taking steps to come into compliance on the software issue. He said he doesn’t believe this specific suit is a major threat to the industry, but companies that export do need to pay attention to the possibility.

On the positive side, he said, “These kinds of cases can inspire enterprises to develop their own software independently.”

Industry analyst Wang Rong of CITIC Securities in Shenzhen said the case is particularly relevant to larger companies, as small garment and textile operations in China are not high-tech industries.

“Generally speaking, this lawsuit might not have a huge impact on the Chinese textile industry since most of the textile companies are just at the beginning stages of IT,” said Wang.

In the Ningbo case, the company has been accused specifically of using pirated Microsoft software worth an estimated $351,000. The suit also said the company has used illegal copies of Abode software to profit.