What Hong Kong businesses should know about using unlicensed software

Earlier this year the Attorney General of the US State of Massachusetts took legal action against Narong Seafood Company Limited on the grounds that the Thailand-based seafood processor was unfairly exporting products to Massachusetts with the aid of unlicensed software.

The case, which was eventually settled, is the first time a State Attorney General (SAG) has exercised authority to stop a foreign company from using unlicensed information technology to compete with US companies. The move will likely prompt actions against other foreign companies that supply goods to the United States in this manner.

Local consumers and enterprises alike choose to use illegal IT (information technology) for a variety of reasons and motives. These include a desire to lower operational costs and lack of IT supervision by management.

The illegal use of IT assets by businesses is a contentious issue. These companies are seen as “subsidizing” or reducing their true cost of production for goods or services.

It is argued that this allows them to enjoy an unfair advantage over compliant businesses, thereby creating an uneven playing field.

Over time, this unfair advantage could negatively impact compliant industries or countries economically, through loss of revenue and business.

US Legislation
In July 2011, certain US states introduced IT legislation, such as the Unfair Competition Act (UCA), aimed at tackling unfair competitive behavior, including the use of stolen IT by overseas firms. The overarching purpose behind the legislation was to ensure a fair trading environment for businesses. The new laws are expected to have the greatest impact on companies operating in the manufacturing value-chain and the IT ecosystem.

The Narong Seafood Company case
In the US State of Massachusetts, the SAG alleged that Narong Seafood Company was using software products without paying the appropriate licensing fees of that software. The use of unlicensed software and avoidance of the costs associated with legitimate licensing allowed the company to gain an unfair advantage over US firms that were using such software legitimately.

The Thai seafood processor company did not dispute the charges, and instead opted to accept an out-of-court settlement that required it to acquire licenses for its software and pay US$10,000 in civil damages.

The settlement marks the first time a US SAG has taken action to prevent a company headquartered outside of the United States from using unlicensed software.

Impact on Hong Kong businesses
Hong Kong is no stranger to the use of unlicensed software. In November 2012, the Hong Kong Customs and Excise Department (HKCED) raided seven small and medium enterprises (SMEs) in the city, leading to the arrest of 12 directors and senior managers following the discovery of unlicensed computer software and products valued at over HK$130,000.

The HKCED says it has seen an increase in the number of Hong Kong SMEs found to be using unlicensed software, with 24 cases reported from January to September 2012 - a 5 percent increase over the same period a year earlier.

Hong Kong SMEs, in particular those doing business with the United States or other Western countries, should be wary of the legal implications of using unlicensed software, which at the very least would disrupt their business operations.

Hong Kong SMEs looking to keep doing business with the US while still using unlicensed software should note that the new laws have dramatically increased the risks associated with such practices. Sanctions, such as those placed on Narong Seafood Company, and the loss of business, due to trade disruptions, negate any short-term benefit gained from not using genuine software.

SMEs are advised to thoroughly review their computer software policies and formulate a set of best practices to minimize the risk of their company staff using unauthorized software for business operations.

Action points to consider

SMEs should enhance their competitive edge by positioning themselves as IT compliant in a market where the number of instances of unlicensed software usage is rising. This will allow them to strengthen their relations with global business partners, enhance their reputation and expand their market share.

SMEs can take the following steps to mitigate the risk of unlicensed software usage:

• Create a clear and concise IT policy that states your position on unlicensed software
• Maintain a software inventory to ensure all software is accounted for and is properly licensed
• Conduct periodical software audits to verify that policies are being followed
• Regularly review and analyze your software needs to better anticipate your future software purchases
• Take any unlicensed IT complaint seriously. Investigate it thoroughly and respond promptly so that all parties involved know that you neither cause nor condone unlicensed software to be used in your business.