updates on trends and cases - ey · pdf fileupdates on trends and cases 3 these recent ......

Rules and regulations onIT and fair competition Updates on trends and cases

Contents

Introduction and background 01

Recent updates on unfair competition 02

Overview 2

Recent lawsuits and disputes 2

Recent trends 4

Compliance business cases 5

Steps companies can take 06

Education and communication programs 6

Software asset management 6

Enterprise risk management 7

Supply chain assessment 7

Conclusion 09

Updates on trends and cases 1

In May 2012, Ernst & Young published a thought leadership publication New rules and regulations on IT and fair competition – Trends and impact, which covered illegal use of IT and its impact on fair competition, the trends arising in business competition from illegal usage of IT, the potential impact of rules and regulations concerned with illegal IT use and fair competition and strategies that can be employed to address the expected impact. As the research indicated, the overall response to unfair competition laws and similar legislation remains positive, and such laws will become the status quo in the future both in the US and worldwide.

This paper is an update of our earlier publication. It describes the recent unfair competition related lawsuit cases and disputes, new trends around the world, and examples of companies that have built IT compliance programs, as well as the recommended actions that companies can take.

Introduction and background

Updates on trends and cases

Recent updates on unfair competition

OverviewThe use of illegal IT programs is by no means a new issue for the global economy. For years, consumers and enterprises alike have fallen back on illegal IT for their computing needs because of a variety of reasons, such as cost, weakness of internal controls and lack of education on the issue. Law offi cials in the United States and other countries are using both existing laws and new legislation to address the issue and promote responsible business practices.

Recent enforcement actions have achieved considerable progress to establish a fair competition business environment. In this section, we look into recent lawsuit cases and disputes, their implications to the industry and companies, as well as grass-root trends and other recent developments in this area. Finally, we discuss business cases of IT compliance actions, the positive impacts of compliance and the implications to the business eco-system.

There have been a number of enforcement actions in the United States with regard to the use of illegal software inducing unfair competitive behavior.

In October 2012, the offi ce of Massachusetts Attorney General Martha Coakley fi ned Narong Seafood, a Thai seafood processor who sold and delivered products in Massachusetts, $10,000 for the use of pirated Microsoft software. In addition to paying a civil penalty, the company agreed not to use unlicensed software in connection with the production or sale of goods entering in Massachusetts.1

Massachusetts took action against Narong Seafood under the state’s unfair competition law. Massachusetts is just one of several states that have recently applied this law to any goods marketed or sold in their jurisdictions, even if they are manufactured abroad.2

In January 2013, California State Attorney General Kamala D. Harris fi led lawsuits against two international apparel manufacturers - China-based Ningbo Beyond Home Textile Co., Ltd. and India-based Pratibha Syntex - for allegedly

attempting to gain unfair competitive advantage over American companies by using pirated software, including Adobe, Microsoft, Symantec and others, in the production of clothing imported and sold in California. The complaints allege that foreign apparel manufacturers which have not paid software licensing fees have a signifi cant cost advantage in the low-margin business of manufacturing, shipping and selling apparel.3

On 3 April 2013, Washington State Attorney General Bob Ferguson shared news that Microsoft recently used Washington State’s unfair competition law to resolve a dispute over software licensing issues with a manufacturing company in Latin America. The dispute relating to the use of Microsoft software is resolved and the company is now in full compliance with the law, cites the Attorney General’s Offi ce.4 The resolution is the fi rst time a company has resolved a matter under the new unfair competition law of Washington State.

Recent lawsuits and disputes

1 Source: The Boston Globe2 Source: Tilleke & Gibbins 3 Source: State of California, Department of Justice Offi ce of the Attorney General4 Source: Washington State Offi ce of the Attorney General

2 Rules and regulations on IT and fair competition

3Updates on trends and cases

These recent lawsuits and disputes have received wide-spread attention from the media worldwide. Figure 1 illustrates some of the recent reports.

Figure 1: Related news headlines from selected media and websites5

The Nation Narong Seafood settles piracy suit with US state23 October 2012

“Narong Seafood has agreed to pay US$10,000 (Bt307,000) to the US state of Massachusetts in settlement for the use of unlicensed software at its Thai plant.”

Bangkok Post Narong Seafood stung by suit23 October 2012

“It is a must for Thai exporters to observe the new US Unfair Competition Act (UCA) banning imports of commodities produced with the use of illegally secured information technology.”

California Department of Justice

Attorney General Kamala D. Harris Files Unfair Competition Lawsuits over Use of Pirated Software in Apparel Industry24 January 2013

“Attorney General Kamala D. Harris today fi led lawsuits against two international apparel manufacturers, based in China and India, for gaining an unfair competitive advantage over American companies by using pirated software in the production of clothing imported and sold in California.”

The Indian Express California Attorney General Kamala Harris fi les lawsuit against Pratibha Syntex Ltd.25 January 2013

“The lawsuits, fi led in Los Angeles County Superior Court yesterday, charge Pratibha Syntex Ltd�. of India and Ningbo Beyond Home Textile Co., Ltd. and its sister companies, of China with violating California’s Unfair Competition Law.”

New Britain Herald Local companies fi ghting theft of intellectual property by China8 March 2013

“US companies, fed up with theft of their intellectual property and information technology by mainland China and other nations, have joined a coalition to fi ght back.”

5 Source: The Nation (US), Bangkok Post (Thailand), California Department of Justice website, The Indian Express (India), New Britain Herald (UK)


The National Association of Manufacturers (NAM) is another organization which has been a supporter of the US Government approach to international IPR protection. NAM is the nation’s largest industrial trade association, representing small and large manufacturers in every industrial sector and in all 50 states. NAM has been committed to working with the US Government to develop ideas and ways to enhance intellectual property protection both in the United States and abroad. NAM believes in order to retain the manufacturing base of the United States, it is critical to protect the intellectual assets in regards to innovators, including patents, trademarks and trade secrets.7

Organizations outside of the United States are also asking their exporters to comply with the unfair competition laws and regulations, and advise them that failure to do so could result in losing access to the US market.

For instance, the American Chamber of Commerce in India (AmCham India) warned many Indian companies to comply with these laws; and that failure to do so could have a signifi cant negative impact on their business and the companies’ bottom line.8 The Automotive Component Manufacturers Association of India (ACMA) announced similar messages to its members.

Another example is related to the automotive sector in Thailand. The International Agency for Intellectual Property and Trade urged major automotive companies to ensure that their supply chain adheres to Thailand’s laws with respect to software licensing and usage. The Open Computing Alliance (OCA), an organization of information and communications technologies companies, recently held a workshop for business leaders in the automotive sector to warn them the charges of unfair competition in the US if they use illegal software. OCA has issued similar pleas for compliance with intellectual property laws in Thailand, but has now turned its focus to Thailand’s robust automotive sector and is urging the auto sector leadership to take fi rm steps to manage its software assets.9

China has also made progress in IPR and fair competition protection. In 2012, IP authorities in China handled over 9,000 IP cases, growing by 199% year on year, of which 2,510 cases were on patent, increasing by 70% year on year.10 China’s Chamber of Commerce for Import & Export of Machinery & Electronic Products (CCCME) has long been an organization promoting growth of international trade and fair competition, playing the role of educating its over 3000 membership companies the importance of compliance to unfair competition laws and regulations in international trade.11

According to the study by Business Software Alliance (BSA), every year, fi rms around the world steal billions of dollars worth of IP. In particular, the theft of IT, which is critical to manufacturing, is estimated to cost more than $63 billion a year in commercial software value alone.

Figure 2: Key statistics

Statistics Data source

IP-intensive industries directly accounted for 27.1m American jobs, or 18.8% of all employment in 2010.

US Department of Commerce report on “IP and US Economy”, 2012

The manufacturing sector accounts for 11.7m jobs nationwide, or nearly 11% of private sector employment.

Bureau of Labor Statistics, 2011

In 2010 alone, manufacturers in the US spent nearly $95b on IT, which is a critical component of research and development and production.

IDC United States Black Book 2Q11, 2011

Between 2001 and 2010, the US lost nearly 30% of its manufacturing jobs.

Bureau of Labor Statistics, 2001-10

More than $63b worth of software was stolen last year globally.

BSA Global Software Piracy Study, 2011

A global piracy reduction by 10% in four years would result in more than $37b in added US GDP, $6.2b in US tax revenue and 25,000 new US jobs�.

BSA Piracy Impact Study, 2010

6 Source: National Alliance for Jobs and Innovation website7 Source: National Association of Manufacturers8 Source: The Economic Times, Comply with Unfair Competition Act, buy legal software: AmCham 9 Source: Thailand The Nation 10 Source: China Intellectual Property Magazine11 Source: CCCME website

Recent trendsAside from enforcement efforts that deal with illegal IT as an unfair competitive advantage, there exist other debates around the regulation of IT and intellectual property rights (IPR), including movements in the US to urge the government to further reinforce legislation.

For example, a group of concerned US businesses, academics and industry stakeholders have joined together to help stop unfair competition that results from theft of intellectual property (IP) and IT and founded the National Alliance for Jobs and Innovation (NAJI). NAJI is a non-partisan organization whose mission is to increase awareness of the problem of stolen IP and its negative impact on jobs, innovation and economic growth. While NAJI recognizes this is a global problem and all companies need to play by the same rules and pay for their IP, the organization’s focus is on educating the public about the problem and how it affects American business and economic growth.6


Compliance business casesDue to increased enforcement measures as well as an increased awareness in the general public, many companies are taking steps to ensure compliance with unfair-competition laws and IT regulations by implementing changes in company policies and procedures. In doing so, these companies have tended to realize signifi cant savings in their overall IT budgets as well as administrative costs. In addition, many companies have also experienced other benefi ts; including less downtime for employees, fewer help desk issues, faster inventory responses and lower labor costs. Figure 3 outlines several cases where businesses complied with the processes and thus benefi ted.

Figure 3: Cases of companies that have taken action on IT compliance12

Company Operation area Company scale Actions Benefi ts

A consumerfood group

Europe (20+ countries)

Revenue: US$ 100mSize: 1,000 employees

�Hired an IT services company to conduct a complete assessment

�Determined the complete software inventory installed on individual PCs and servers

�Reviewed purchase documentation against installed software and regulatory requirements

�Created a report consisting of all licenses owned, including any shortages or surpluses

�Introduced effective policies to optimize how the company purchases and maintains software

�Assured IT legal compliance

�Cost effi ciency of IT purchase

�Clear visibility of the software assets

�Improved software management

A consulting fi rm specializing in engineering

Worldwide (40+ countries)

Revenue: US$ 1bSize: 8,000 employees

�Conducted software asset management programs

�Developed and maintained a centralized software purchasing and tracking system

�Reduced software programs based on requirement analysis

�Improved software purchasing planning

�Made software acquisition a smooth and effi cient process

�Standardized software solutions

�Reduced IT support personnel costs

A supply chain leader



�Created a software system to constantly monitor and reconcile the usage of software

�Delegated Global IT compliance and Risk Management department to foster compliance across the company’s ecosystem, including customers and suppliers

Established a high ethical standard as company culture

�Ensured every player is doing business ethically throughout the value chain

�Signifi cantly reduced costs of software management

A semiconductor industry leader



Evaluated individual employee’s software needs and designed a standardized software package to fulfi ll the needs

�Constantly reinforced the importance of the proper and authorized use of software

� Used automated software to conduct the monitoring of all software installed and used within the company

�Increased effi ciency of its software investment

�Ensured the viability and competitiveness of the company

�Achieved customer trust, technology leadership and manufacturing excellence

A global PC/ mobile phone maker



�Established centralized IT security control team

Conducted regular training and communication and IT audit process

�Conducted supply chain assessment in partner selection including IT integrity

�Increased IT operation effi ciency

�Reduced IT acquisition costs

Improved supply chain partnership quality

A global software and hardware systems company

Worldwide(150+ countries)


�Conducted software asset management program

�Established regular IT audit process

�Implemented centralized IT security control policy and constantly monitored software used by employee

�Conducted regular training programs on IT regulations including unfair competition laws

�Increased awareness of IT regulations

�Assured IT compliance

�Achieved cost effi ciency of IT operations

�Clear visibility of the software assets

12 Source: Ernst & Young research, analysis, interviews

Steps companies can take

The unfair competition laws and other IT regulations directly impact manufacturing and other industries. Faced with the risk of enforcement action and/or the inability to sell into the US market (and potentially other countries), enterprises are expected to take key actions such as education and communication, software asset management, enterprise risk management and supply chain assessment to prevent potential illegal issues.

In many companies outside of the US, awareness of unfair competition laws and regulations is still lacking. Thus a strict internal supervision system is recommended to avoid potential legal risks. Companies need to promulgate stringent IT rules and policies to heighten their employees’ awareness of IT compliance.

Fair competition relies on both an employer and employee’s awareness and sense, where education and communication play very important roles. For example, a company may provide a wide range of training programs about legal usage of intellectual properties and IT, offering case studies to generate peer pressure against inappropriate behavior.

Educational initiatives should both address and discourage the use of illegal IT in business operations, highlighting the potential risk to both company as well as its individuals. Through on-line training, company newsletters and conferences or seminars companies can hope to:

�Educate employees to respect patents and intellectual properties

�Prevent illegal or inappropriate IT behavior

�Raise awareness of unfair competition laws and IT regulations

�Establish corporate culture of high ethical standard and integrity

To ease concerns over the use of illegal IT within the enterprise, companies should take a more proactive role to ensure that infrastructure equipment and software all hold applicable licenses. Software Asset Management (SAM) is a practice of implementing a series of standardized processes and procedures to ensure legal software compliance by helping companies to control costs and optimize software investment and management across the organization.

There are also specifi c tools that can be used to manage a company’s software asset. For example BSA developed Verafi rm, “an industry-supported portal that helps companies effectively manage their software, effi ciently document that their software is licensed, and connect with customers interested in doing business with ethical companies”.13

SectorExpertsPeople

ProcessesTechnology

Identify individuals within each business unit to be responsible for maintaining licensing information

Establish centralized IT monitor team

Identify and consolidate disparate data sources relating to asset management

Improve the level of administration rights assigned to end-users

Establish automatic system to monitor licenses

Implement a process to prevent or detect illegal software purchases

Implement a process to identify and remove illegal software

Establish controls of the software assets within an organization, throughout all stages of their lifecycle

Figure 4: SAM key components

Education and communication programs

Software asset management

13 Source: Verafi rm website



Companies can also perform an Enterprise Risk Management (ERM) program to mitigate IT-related risks. ERM can help companies identify, assess and prioritize their key business risks across the organization, including the risks related to illegal IT and IP.

Figure 5: ERM key processes

Figure 6: SCA key processes

Enterprise risk management

Supply chain assessment

Strategic direction

Confi rm stakeholders’ expectation

Conduct interview to learn the general operations

Collect data and conduct analysis to clarify the issues

Supply chain direction & support

Procurement Operations Services

Product lifecycle

IT infrastructure

Supplier qualifi cation (including IT)

Document fi ndings & recommendations

Communicate fi ndings and recommendations to the stakeholders

Prepare the report

Supply Chain Assessment

Strategic direction Data analysis Assessment execution Reporting

Risk identifi cation Risk evaluation Risk management Risk monitor

Organizational objective analysis

Risk information database

Major risk

Internal and external risk analysis

Questionnaire Data analysisInterview and

discussionCommunication

and report

Risk relationship analysis

Performance rewards

Supervision and testing mechanism

Risk event analysis

Resource allocation

Risk pre-warning mechanism

Risk management strategy

Risk supervision solution

Supply Chain Assessment ��(SCA) is an important program for companies, especially those in the manufacturing industry, providing them a diagnosis of their supply chain processes from both quantitative (performance metrics) and qualitative (process maturity assessment) perspectives. It also helps companies identify potential IT issues with their suppliers or business partners in the ecosystem, thus mitigating the risks of violating unfair competition laws or similar regulations.


In addition to helping companies fulfi ll unfair competition law requirements and mitigate IT-related risks, SAM, ERM and SCA are three actions that can benefi t companies in many ways, as summarized in Figure 7.

Action Defi nition Methodology Benefi ts

Software asset management

The infrastructure and processes necessary for effective management, controls and protection of the software assets within an organization, throughout all stages of their lifecycle

Plan — Evaluate technical and organizational requirements for the software assets, and plan the required quality and quantity

�Acquire — Identifi cation of potential vendors and negotiation of the most cost-effi cient contract and volume

�Deploy — Ensure the usage is recorded properly within the databases

�Manage — Enhance productivity within the existing infrastructure and sustain user satisfaction. Increased transparency can be established by managing the distribution of software assets, license inventory, software upgrades and maintenance activities

�Retire — The planning and execution of orderly disposal of the software assets, closing of contracts and licenses and proper de-installation

�Potentially reduce liability risk by maintaining license compliance and avoid related penalties

�Lower potential costs by helping to avoid license overbuying

�Help manage more effi ciently the otherwise resource-draining and labor-intensive compliance processes

�Limit potential reputational risks associated with license violations or compliance related confl icts with vendors14

Enterprise risk management

Effective framework of assessment to help identify, assess and prioritize their key business risks

�Co-develop a preliminary risk profi le and map to business objectives, strategies and processes

�Customize the risk assessment criteria for assessing and prioritizing key business risks

�Survey select business management and key stakeholders to identify key business risks

�Conduct select interviews with key stakeholders to identify key business risks across the organization

�Provide solutions to mitigate identifi ed business risks

��Help identify the key business risks to the organization

�Converge and align the disparity of risk reports across the enterprise

�Manage expectations for effective risk coverage driven especially by audit committees, executive management and stakeholder demands for stronger corporate governance and transparency

�Provide risk coverage in areas requiring special knowledge of IT, major capital programs, fraud, acquisitions and joint ventures

�Add benefi t through process and control improvement recommendations, sharing of leading practices and helping to implement major change initiatives

Supply chain assessment

A diagnosis of the company supply chain processes, from both a quantitative and a qualitative perspective

�Identify issues and risks of the specifi c processes within each of the key areas of supply chain management:

�Direction and support

�Planning process

�Procurement process

�Operation process

�Fulfi llment process

�Service process

�Product lifecycle management process

�Analyze the identifi ed areas and the existing processes and benchmark with leading practice

�Design improvement solutions and help to implement the designed solutions

�Clarify and understand the key requirements of the company’s internal and external customers

�Identify critical success factors and establish performance targets to support overall strategic goals of supply chain management

�Assist the company to prioritize specifi c performance improvement initiatives to achieve goals

�Provide assistance with the vendor selection process, including vendor’s IT compliance assessment

Figure 7: Key actions and benefi ts summary

14 Source: Ernst & Young, Effective Software Asset Management

The trends arising from IT rules and regulations regarding fair competition in markets are having an increasing impact on business players. Though it is still too early to judge how much impact it will bring at the macroeconomic level, recent cases have had a considerable impact on companies, industries and the whole IT ecosystem built around them. This paper has furnished a picture of legislative trends, consequences of non-compliance and actions that a company can take.

Companies should be proactive to cope with the emerging enforcement of unfair competition legislation around the world. The way companies react to the unfair competition laws and IT rules and regulations will make a signifi cant difference to their business growth. Companies maintaining IT compliance could take actions such as education and communications, SAM, ERM and SCA to benefi t from: good corporate governance, increased fl exibility and agility, reduced intangible liability and excellent global reputation.

Meanwhile, companies compliant with the legal IT and fair competition legislations can use their compliance as a competitive advantage over their competitors. For example, a compliant manufacturer can promote itself as a trustworthy trading partner in the market, which could improve its relationships with global trade partners. Having an external party perform IT audits and obtaining a certifi cate as proof of using legal IT would allow greater ease for a manufacturer in negotiations with global partners.

Companies such as retailers could also promote that its supply chain is compliant with legal IT and fair competition legislations. This could be an effective marketing tool to appeal to consumers who are in favor of legal or original products – that the products available for purchase have been produced without the use of illegal IT.

Conclusion


Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2013 EYGM LimitedAll Rights Reserved. FEA no. 00000180

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

www.ey.com

ED None.

Stephen Y. LoPartner, TMT Leader, Greater China+86 10 5815 [email protected]

Edward ChangPartner, Advisory, Greater China+86 10 5815 [email protected]

Keith YuenPartner, Advisory, Greater China+86 21 2228 [email protected]

Raymond WongPartner, Assurance, Greater China+86 10 5815 [email protected]

Martin NgaiPartner, Tax, Greater China+86 10 5815 [email protected]

Ben KwanPartner, Transaction Advisory Services, Greater China+852 2849 [email protected]

Contact us

updates on trends and cases - ey · pdf fileupdates on trends and cases 3 these recent ......

Documents