Microsoft In China Case Study

“This is about business — that’s all it is,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a nonprofit research group in Washington. “All this other stuff about hosting and being nice doesn’t fundamentally change the Chinese calculation. This is the strategy they have, and they’re going forward pretty relentlessly.”

Last year, Qualcommpaid a fine of $975 million for violating China’s antimonopoly law, and in 2014, Volkswagen and Chrysler were fined a total of $46 million for violating antitrust rules.

The new scrutiny of Microsoft by the regulator, the State Administration for Industry and Commerce — known as SAIC — stems from antitrust investigations of major Western tech companies in 2014.

In July of that year, about 100 SAIC officials stormed four Microsoft offices in China, questioning executives, copying contracts and records, and downloading data from the company’s servers, including email and other internal communications.

The Chinese regulator on Tuesday said it was seeking answers to “major questions” that arose from the data but did not provide any further details of the investigation. Analysts have said that Microsoft’s difficulties in China began in 2014, when the company decided to end support and security updates for Windows XP, a 14-year-old operating system that it hoped users would replace by upgrading to Windows 10 and other recent, more secure operating systems.

With many Chinese companies and government offices running versions of old Microsoft software like XP, the move highlighted the country’s reliance on the American company. Even though the bulk of Chinese users of Microsoft software acquired pirated versions without paying Microsoft, the company was nonetheless criticized for ending support in favor of its newer software.

In an article about the investigation published on Tuesday, China’s state-run news agency Xinhua said that Microsoft was suspected in 2014 of causing computer compatibility problems by not fully disclosing information about its Windows operating system and Microsoft Office suite of applications. “According to Chinese law,” the article said, “incompatibility without advance warning to customers could be regarded” as being anticompetitive.

A Microsoft spokesman, who spoke only on the condition of anonymity as a matter of policy, said on Tuesday that the company was “serious about complying with China’s laws and committed to addressing SAIC’s questions and concerns.”

Microsoft has sought in recent months to improve its relations with China’s government. The company held a prominent meeting of Chinese and American tech leaders in Seattle in September that was a major stop of the Chinese president during his tour of the United States.

During the meeting, Microsoft announced several partnerships, including a cooperative effort with the China Electronics Technology Group, a state-run company that makes technologies to support the Chinese military. That effort is meant to help tailor Windows 10 to the demands of the Chinese government.

Mr. Atkinson of the Information Technology and Innovation Foundation predicted Chinese regulators could use a case against Microsoft to force concessions, such as requiring the company to continue to provide support to Windows XP PCs.

Longer term, he says Chinese leaders would like to see local alternatives to Windows to lead in the market; some popular local alternatives exist in other sectors of technology, like Internet search. One top PC maker, Dell, has begun shipping more machines in China that come with a Chinese-made operating system, NeoKylin, installed on them.

It has been difficult to dethrone Windows from PCs in China, though, since so many of the world’s most popular software, from games to business applications, run on it.

“I think the strategy is essentially what I term de-U.S.A.,” he said.

Correction: January 5, 2016
An earlier version of this article misstated part of Xi Jinping’s itinerary when he visited the United States last year. Bill Gates attended a group dinner with Mr. Xi; Mr. Gates did not host Mr. Xi at his house.

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[Abstract] In a decision made by Wuhan Intermediate People’s Court (“Court”) on copyright infringement disputes between Microsoft Corporation (“Microsoft”) and Beijing eFuture Technology Co., Ltd. (“eFuture”), two rules were set that may provide precedent in other copyright infringement suits:

  1. Employer is liable for use of pirated software installed in computers personally owned by employees for employer’s business; and
  2. Copies of pirated software installed in the spot-checked computers can be used to estimate the total number of pirated software used by employer.

Case Summary

In November 2010, Microsoft investigated and found that eFuture had duplicated, installed and commercially used copyrighted Microsoft software products without its authorization or license. In the ensuing 10 months, Microsoft tried to negotiate with eFuture to resolve this dispute, but eFuture was not cooperative. In October 2011, Microsoft filed four complaints against eFuture before the Court respectively asserting that eFuture infringed upon its copyrights of Microsoft Windows, Microsoft Office, Visual Studio and Microsoft Server. In the complaints, Microsoft asked eFuture to stop infringing upon its copyrights, compensate its losses of about RMB 5.26 million, and afford all judicial fees before the Court. In the meanwhile, Microsoft raised correspondent evidence preservation requests in the Court. The Court accepted the four complaints and made a spot check on computers in the offices of eFuture to preserve infringement evidence upon Microsoft’s requests.

After a nearly 6 month trial, the Court adjudicated the four lawsuits in public on December 10, 2012, finding that eFuture illegally used the software series of Microsoft Windows, Microsoft Office, Microsoft Visual Studio, Microsoft Windows Server and Microsoft SQL Server. eFuture was ordered to compensate Microsoft RMB 3,879,573 in total for the latter’s economic losses and reasonable expenses to stop its infringement activities, and was ordered to afford all judicial fees. Neither eFuture nor Microsoft appealed the trial decisions, and then they reached a settlement on carrying out the decisions.

Comments of Lifang

1. An employer is held liable for installment and use of pirated software on personal computers of its employees.

In precedent cases involving software copyright infringement issues, it was common that defendant companies owned computers installing with software in question. However, in this case, computers installing with illegal duplication of Microsoft software belong to eFuture’s employees. Therefore, among other arguments, both defendant and plaintiff focused on whether eFuture should be liable for the illegal duplication installed in the employees’ personal computers.

eFuture is a leading provider of software and e-services in retail and consumer goods industries in the Asia-Pacific Region, with more than 800 employees working in its nationwide branches in China. To save its operation costs, eFuture did not provide computers to its employees, but to subsidize the computers purchased and owned by them. In view of the different ownership of computers, eFuture refused to take liabilities and argued that computers spot-checked by the Court in the course of evidence preservation belonged to the employees rather than itself, though they were placed in its offices, and that it was the employees’ personal acts to install the illegal software copies. Apparently, eFuture’s arguments cannot set up.

In determining whether reproduction and installment of infringing software on employees’ personal computers constitute a commercial use for which a company should be liable, factors such as the nature and scope of the company’s business and the industry it belongs to must be considered. In this case, Defendant eFuture was a software company providing software technical services to its customers. Its business nature required that computer devices installing relevant software be necessary in its operation, and that its employees worked on computers using software to complete their tasks. eFuture subsidized the employees who worked on their personally owned computers to complete their tasks assigned by eFuture, and in turn owned their products. Accordingly, it was evident that eFuture actually used the software and hardware personally owned by its employees in its business operation, and such uses were commercial. According to Article 43 of the General Principles of Civil Law, “A business entity shall bear civil liabilities for business activities of its legal representative and other employees,” eFuture were liable for the installment and use of illegal copies of Microsoft software by its employees.

2. Copies of pirated software installed in the spot-checked computers can be used to estimate the total number of pirated software used by the employer.

Statutory Damages Calculation in China

Copyright Law of China
Article 49.1. if a copyright or copyright-related right is infringed, the infringer shall compensate the right holder for the actual losses caused by the infringement; if the actual losses are difficult to calculate, compensation may be made according to the illegal gains of the infringer. The monetary compensation shall also include the reasonable expenses of the right holder for stopping the acts of infringement.

Interpretation of the Supreme People's Court Concerning Several Issues on the Application of Law in Hearing Civil Cases Involving Copyright Disputes
Article 24. The actual losses of the right holders may be calculated as the multiplication of the decreased distribution volume of the reproduced products due to the infringement or the sales volume of the infringing products by the unit profit of the reproduced products of the right holders.
Article 26. Reasonable expenses incurred in stopping infringement include reasonable costs of investigation and evidence collection. The court may include in monetary compensations attorney fees in compliance with relevant law and regulations.

In case that an accused infringer is a large-sized company, it is not practicable or doable to inspect all computers located in its offices for preserving infringement evidence. In practice, courts usually take a spot check on a small number of computers of the accused infringer to get an average number of infringement software copies installed in each computer. Calculating the proportion of the checked computers in all computers of the accused infringer, courts estimates the total number of infringement software copies used by the accused infringer, which can be treated as the number of authentic software that the copyright owner should have sold to the accused infringer. That is, it is comparatively reasonable to decide the amount of damages based on the number of spot checked computers.

In this case, eFuture admitted that one employee used one computer, so the Court knew the actual number of computers eFuture had and then calculated the proportion of spot-checked computers to all eFuture computers. The Court counted the number of pirated software copies installed in the spot-checked computers, and estimated the total pirated software copies used by eFuture on the basis of the proportion. Multiplying the actual sale prices of the authentic software in question with the estimated total number of pirated software, the Court reached the amount of economic losses of Microsoft had suffered. We think that the calculation methodology of damages herein can serve as a good reference for future similar cases.

As to the reasonable expenses Microsoft spent to stop eFuture’s infringement, the attorney fees and notarization fees to fix eFuture’s infringement activities shall be counted in. Under the above-mentioned judicial interpretation, the Court ordered eFuture to afford the expenses as well as the judicial fees accordingly.

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