31 October 2002

Edward Alder

Despite the occasional efforts of the HKSAR Government to promote Hong Kong as a knowledge-based economy, it’s a shameful fact that software piracy flourishes openly on Hong Kong’s high streets.

Most visibly, this takes the form of CDs on sale at trestle table stores containing obviously pirated brand name software at a fraction of the retail price of the real thing. More insidious, in some respects however, is another form of software piracy. This is the practice of computer retailers who are authorised members of software companies’ established retailing programmes installing on the computers they sell free copies of the very software they are meant to be retailing at full price.

This invisible form of piracy is so objectionable because it is carried out under the veil of a legitimate transaction and the buyer may not know, or may not feel, that he or she is doing anything wrong in accepting a PC with “free” software installed. But it amounts to intellectual property theft nonetheless.

One might think that assessing the cost of this practice to software companies is an impossible task due to the many imponderables involved. This month the Hong Kong High Court has had to grapple with this problem and reach a damages figure in a case brought by Microsoft against Able System Development Limited.

Microsoft produced evidence from investigators showing that Able had been selling PCs at its centres in Wanchai, Mongkok and Shamshuipo loaded with unlicensed copies of Windows and Office software. Microsoft obtained a judgment on liability and injunctions against Able last year and the case moved to the assessment stage this March.

Microsoft succeeded in obtaining discovery (production) of some 56,000 of Able’s sales invoices from 1997 and 1998 and financial statements from as far back as 1994. Remarkably, Microsoft was also able to subpoena one of Able’s former management team to appear at the assessment hearing. The former employee testified that Able had sold up to 2000 PCs a year and only 10% or less was sold with fully licensed software.

With this evidence in hand the judge had to determine the principle to be applied in awarding compensatory damages for copyright infringement. Under the leading Hong Kong and English cases the usual yardstick is the royalties or profits the copyright holder would have received had all the pirate copies had been paid for.

The judge considered a 10 year old Australian case where the court had accepted arguments that this yardstick is overgenerous. They were first that had full prices been charged for all copies the same number would probably never have been sold, and second, perversely, that the prevalence of the pirated products might actually have increased the value of the residual copyright asset. He rejected this approach, in part because it had been rejected in a subsequent Australian case also, as it happened, involving Microsoft.

Microsoft had also made the usual claim under the copyright legislation for additional damages on the grounds of the “flagrancy” of the infringement. In considering the approach to be adopted for these claims the judge again reviewed various Commonwealth cases before making his assessment.

He said that in view of the fact that Able had been an authorised Microsoft retailer, the fact that the absence of full business records had possibly deprived Microsoft of full compensatory damages and the sheer scale of the piracy, Able’s conduct had been flagrant and additional damages should be awarded.

This resulted in an award of nearly HK$36 million, reportedly the largest ever in a Hong Kong copyright case. A salutary lesson for Hong Kong’s computer retailer community.

Also published in SCMP on 31 October 2002.