Microsoft Pursues New Tack on Piracy Software Maker Forges Alliances With State Attorneys General By James Hagerty

and Shira Ovide March 16, 2014 Long frustrated in efforts to collect payments from some users of its software in China and other emerging markets, Microsoft Corp. has enlisted help from an unlikely set of allies: attorneys general in states such as Louisiana and Oklahoma. Attorneys general don't typically get involved in overseas disputes involving companies from outside their state borders. But Microsoft, based in Redmond, Wash., has helped persuade attorneys general that overseas software piracy leads to job losses at manufacturing companies in their states. That's because foreign manufacturers exporting products to the U.S. can shave business expenses by using stolen software, gaining an unfair cost advantage over American rivals who pay for software, according to Microsoft and its allies, including the National Association of Manufacturers trade group. "It wasn't until we made the connection between stolen software and manufacturing that we got traction," said Rob McKenna, president of the National Alliance for Jobs and Innovation, a nonprofit formed in 2012 by Microsoft and the manufacturers trade group to fight piracy. Mr. McKenna, a former state of Washington attorney general, who narrowly lost a 2012 bid for governor of that state as the Republican candidate, has stitched together an informal alliance among Microsoft, attorneys general and manufacturers. The attorney general's office in Oklahoma last week filed suit against a Chinese maker of oil equipment, alleging it was stealing software written by Microsoft and others and gaining a cost advantage over Oklahoma-based competitors. That suit came just days after Louisiana's attorney general announced a settlement with a Chinese maker of barbecue grills after threatening a suit on similar grounds. Those efforts follow similar warning letters or lawsuitsinvolving allegations against companies in Asia and Latin Americafiled over the past two years by attorneys general in California, Tennessee, Massachusetts and Washington state. In pursuing these cases, state officials said they are defending local companies and jobs. "We want to level the playing field" for businesses, Louisiana's attorney general, James D. "Buddy" Caldwell, said during an interview. In the past, the usual route for manufacturers suspecting unfair practices by foreign competitors was to file a complaint via U.S. trade officials, said E. Scott Pruitt,

Oklahoma's attorney general. Often, he said, those complaints were ignored by foreign companies or drew only "lip service." Software piracy is a huge problem for Microsoft. In 2011, then-Microsoft Chief Executive Steve Ballmer said piracy in China meant the company's total revenue from the world's most populous country was less than what Microsoft generates from the Netherlands, a country of fewer than 17 million people. Microsoft has tried litigation, cuts to software prices and introducing technology that disabled pirates' computer screens. Mary Jo Schrade, assistant general counsel in Microsoft's cybercrime division, estimated she personally has filed more than 1,000 lawsuits related to unlicensed versions of the company's software. Courts outside the U.S. aren't necessarily hospitable to Microsoft's legal arguments about unlicensed software. Microsoft also works with law enforcement to break up criminal gangs of software counterfeiters. The company last fall opened its Cybercrime Center, a multimilliondollar facility to collaborate with companies, legal authorities and police to stop software abuses. The company says roughly 300 employees work at least part time on software piracy or software-license compliance. "They literally have big screens on the wall and they can track where stolen software is being used anywhere in the world," said Trey Phillips, first assistant attorney general of Louisiana, who recently joined other law-enforcement officials on a tour of Microsoft facilities. A study by BSA, the trade association representing Microsoft and other software makers, said the commercial value of pirated personal-computer software was $63.4 billion in 2011. The BSA report said more than two-thirds of PC software in emerging markets was unlicensed, compared with 24% in mature markets. The Oklahoma suit, filed in a state district court, alleges that Neway Valve Co. and affiliates, based in China, where they make valves and other equipment for oil companies, illegally obtained "copyrighted software that is crucial to the production and sale of their products," gaining an advantage over Oklahoma-based rivals. The suit seeks unspecified fines and penalties. David Standefer, president of Neway's U.S. distribution unit, said the company is investigating the allegations and wants to "ensure that our manufacturing facilities are doing what they are supposed to be doing." Valve manufacturer Balon Corp., of Oklahoma City, was named by the attorney general as an injured party. That came as news to Phil Scaramucci, co-president of Balon, who

said that he didn't know much about Neway and wasn't aware of the suit until he read about it in the newspaper. Still, Mr. Scaramucci said, "if those dirty rascals are doing something, I hope somebody goes after them." Louisiana's attorney general, Mr. Caldwell, on March 6 announced a settlement with Guangdong Canbo Electrical Appliance Co., whose products include grills. After the state threatened to ban imports of those grills, Canbo agreed to pay more than $250,000 to software providers and consented to an audit next year "to ensure they remained compliant," Mr. Caldwell said. He didn't specify which software providers would get the payments but said the attorney general's office "worked with Microsoft to gather evidence." Two Canbo officials reached by telephone in China declined to discuss the matter. Mr. McKenna said that about two years ago, when he was still attorney general of Washington state, Microsoft provided evidence to him that Embraer SA, a Brazil-based maker of airplanes, used Microsoft software without paying full licensing fees. Mr. McKenna sent two letters to Embraer in 2012, threatening legal action. His successor announced in April 2013 that Embraer settled the dispute with Microsoft and was "in full compliance with the law." Terms weren't disclosed. A spokesman for Embraer said the settlement was "the result of commercial customer/supplier discussions regarding the interpretation of the terms of the contract." He added: "We would certainly reject the idea that we may have made undue use of Microsoft software." The attorneys general would have been unlikely to stumble on the alleged software piracy without Microsoft's help, but Ms. Schrade denied that the company is driving the legal campaigns. "The states that are taking action are taking action on their own agenda," she said. "Certainly, it's mutually beneficial."