CB(1)1457/98-99(02)

Hong Kong Software Industry
Comments on June 1999 Trade and Industry Bureau Submission to
The Legislative Council Panel on Trade and Industry

(Additional Measures to Combat Intellectual Property Rights Infringement)
June 3, 1999

The software industry fully supports two of the government's three Shorter Term Measures:

• Including Piracy and Counterfeiting Offences under the Organized and Serious Crimes Ordinance

• Clarification of the law criminalizing the possession of infringing goods other than for personal domestic use.

The software industry also supports the taking of action against the possession of video recording equipment in movie theaters, but since it is outside our area of interest and expertise, we defer to the government and comments of the film industry.

As noted in the attached comments on the Additional Measures submitted on April 30th to the Trade and Industry Bureau, we fully support the introduction of mandatory or standard sentences for copyright and trademark offences, and applying closure orders to premises used for piracy or counterfeiting activities after a first conviction. We support each of the three initiatives to facilitate enforcement, including allowing a random sampling of suspected infringing goods to be prima facie evidence of 100% infringement in a criminal case, shifting the evidential burden of proof on the issue of licensing of copyright articles, and the licensing of retail outlets selling optical discs. Although we note the government's concern about the resources necessary to establish the retail outlet licensing system, we believe that this would be an extremely effective way of controlling this type of piracy and hope that the government will reconsider its decision to put this proposal aside.

Finally, the software industry continues to believe that the police should be formally enlisted in the fight against the retail sale of pirated goods. Doing so will address this aspect of the piracy problem in Hong Kong with far more resources than the Customs & Excise Department can provide and will free the Customs & Excise Department to focus on the many other aspects of intellectual property piracy here in Hong Kong, like the above-mentioned retail outlet licensing system. We hasten to add, however, that we consider the work undertaken by the Customs & Excise Department to be of a very high caliber and the serious commitment of Customs & Excise officers to anti-piracy activities to be unquestioned.

The Software Publishers Association
The Business Software Alliance

Software Industry Submission
on the Consultation Paper:

"Combating Intellectual Property Rights Infringement in the
Hong Kong Special Administrative Region:
Possible Additional Legal Tools February 1999"

Introduction

The software industry in Hong Kong welcomes the opportunity to provide its comments on the Consultation Paper "Combating Intellectual Property Rights Infringement in the Hong Kong Special Administrative Region: Possible Additional Legal Tools - February 1999" (the Consultation Paper). The software industry, comprised of Hong Kong and foreign-based companies, represents an area of considerable potential for Hong Kong. However, the industry's ability to survive and thrive is significantly limited because of the relatively high software piracy rates in Hong Kong. While piracy damages the entire industry, it has a disproportionate effect on small, local companies. Multinational companies generate revenue in a number of markets, but small local companies typically must do well in Hong Kong before they are able to compete regionally and on a global basis. For many local companies, software piracy is their largest competitor, preventing them from reaching their potential and, in some cases, forcing them out of business. According to figures released by the Business Software Alliance (BSA) and the Software Publishers Association (SPA), software piracy in Hong Kong cost the package software industry over HK$953 million in 1997.

The economic contribution of the software industry and the effects of piracy on that contribution are well documented. A recent study concluded by the international accounting firm of Pricewaterhouse Coopers found that the software industry contributed 4,199 jobs in 1996 and will create 6,949 jobs in 2001 assuming current growth rates. However, if piracy is lowered from 64% (where it was in 1996) to 27% (the approximate level in the United States and Japan), the number of jobs created by the software industry is conservatively estimated to shoot up to 16,512 by 2001. Furthermore, if piracy is lowered to 27% from current levels, tax revenues paid to the Hong Kong government are conservatively projected to increase from HK$784 million to HK$1.78 billion in 2001.

Piracy therefore has a significantly negative effect on the software industry in Hong Kong and on the Hong Kong economy as a whole. It prevents the creation of the very high-wage, high-skill jobs that the Hong Kong government is looking for as we move into the 21st Century, and the deprives the government of the tax revenue necessary to pay for various public works projects. The software industry therefore urges the Hong Kong government to take the steps necessary to address the software piracy problem in Hong Kong. Some of the proposals in the Consultation Paper will help create useful tools to address some of these enforcement challenges, and we support them. However, it should be clear that the legal tools currently available to the government are meaningful and could be used to significantly reduce the piracy rate in Hong Kong if enforcement efforts were stepped up against the range of software piracy challenges faced by the industry.

The comments below first lay out the various piracy challenges faced by the industry and then address the relevant provisions of the Consultation Paper. The software industry respectfully thanks the Hong Kong government for the efforts it has already made to combat piracy and looks forward to supporting the government in any way it can as it continues this important work.

Piracy and the Software Industry in Hong Kong

In Hong Kong, the term "software piracy" actually includes four distinct types of piracy. In order of their importance in terms of the losses caused to the industry, they are:

• Corporate Piracy - the unauthorized corporate use of software;

• Hard Disk Loading Piracy - the unauthorized loading of software onto hard drives of computers;

• Optical Disk Piracy - the sale of CD-ROMs and recordable CDs loaded with illegal copies of software; and,

• Internet Piracy - the use of the Internet to advertise the sale of or to distribute pirated software.

Software companies and the Hong Kong government have for many years attempted to change the perceptions of the Hong Kong people with regard to software piracy through public education. However, because public education alone has not been enough to change behavior, software companies have had to enforce their rights through legal means. Civil enforcement has had some effect on public attitudes, but not as much as we had hoped. We therefore believe that enforcement of the criminal provisions under current Hong Kong law is necessary against each type of piracy we face, including Corporate Piracy and Hard Disk Loading Piracy. We also call on the Hong Kong government to review whether its current laws address the growing use of the Internet as a vehicle for advertising the sale of pirate CD-ROMs and for distribution of unauthorized copies of software. We have developed tools that show the relevance of Hong Kong's copyright law to the Internet, and encourage the government to turn their enforcement mechanisms to this emerging realm as well. Finally, the software industry supports the immediate involvement of the police in combating the retail sale of optical disks containing pirated software and other works; these additional resources should effectively address this overwhelming problem and free up Customs & Excise resources to address other aspects of optical disk piracy and the other types of piracy noted above.

Comments on Consultation Paper

The software industry commends the Hong Kong government on the considerable thought that has gone into the development of the Consultation Paper. It reflects a number of the proposals put forth by the copyright-based industries and additional thought that builds on these proposals. Not all the proposals in the Consultation Paper relate to the piracy situation faced by the software industry in Hong Kong; we will therefore comment only on those that have an impact on our industry.

Option 1: Including piracy and counterfeiting offenses under the Organised and Serious Crimes Ordinance.

The software industry believes there to be adequate evidence that some aspects of copyright piracy and counterfeiting in Hong Kong are carried out by organised criminal elements. As a result, it supports the inclusion of piracy and counterfeiting offenses under Schedule 1 of the Organised and Serious Crimes Ordinance (OSCO). This would further equip enforcement authorities with the tools they need to address high level criminal activity in this area. It would also send a clearer message to these pirates and the consumers who might be tempted to purchase illegal product from them that piracy is a serious problem for Hong Kong and will be dealt with accordingly. While bringing piracy and counterfeiting under Schedule 1 of OSCO will be useful in those cases where criminal organizations are engaged in these offenses, it should be noted that this alone is unlikely to address the overwhelming problem of retail sale of pirated product in Hong Kong. As noted above, day-to-day involvement of police on the streets is necessary to address that problem adequately.

Option 2: Amending the Copyright Ordinance and the Trade Descriptions Ordinance to provide for the confiscation of criminal proceeds from intellectual property infringement offenses.

Option 2 is to a degree duplicative of Option 1. Because Option 1 is the preferable legislative modification since it does more than just allow the confiscation of criminal proceeds, we support it and believe that if it is adopted, Option 2 will not be necessary.

Option 3: Introduction of mandatory or standard sentences for copyright and trademark offenses.

The goal of any criminal law system is to punish individuals for their serious conduct and, more importantly, to deter others from the same conduct. Unfortunately, the weak penalties typically imposed in criminal piracy and counterfeiting cases in Hong Kong have not been strong enough to deter those who would engage in similar illegal conduct. The fact that pirate retail shops re-open immediately after Customs & Excise brings enforcement actions against them is a clear indication that pirates do not consider the criminal enforcement regime in Hong Kong sufficiently punitive to deter their illegal conduct. The maximum penalties under Hong Kong law for copyright piracy or counterfeiting are significant, but they are never imposed. We therefore support the introduction of minimum mandatory sentences for copyright and trademark offenses. These should be set at a level necessary to create a real deterrence to future conduct.

The Consultation Paper notes that minimum mandatory sentences may not be advisable because organized criminal elements typically exploit young, old, and weak people to take the front line in handling infringing articles; stronger penalties may result in prison sentences that may be considered "draconian"; and young people may not understand what they are getting into when they participate in this illegal conduct. The software industry believes that these concerns miss the purpose and effect of minimum mandatory sentences. Minimum mandatory sentences should be used as a vehicle for educating Hong Kong citizens of the risks associated with this illegal conduct. The goal should be to communicate these minimum mandatory sentences to would-be pirates to deter them from engaging in this illegal conduct in the first place - to minimize the number of people actually subject to these penalties by educating the public up front about their adoption. There will of course be some who choose to test the system and who will therefore be subject to these penalties, but their punishment should reinforce the deterrent effect of this sentencing structure. Keeping sentences low to protect the interests of low-level pirates perpetuates their involvement in this illegal activity and foregoes the deterrent effect of the criminal law, whereas creating minimum penalties will send the right message and have the desired effect on behavior.

Option 4: Closure orders against premises used repeatedly for piracy or counterfeiting activities.

Option 5: Immediate closure orders for premises used for piracy or counterfeiting activities.

The software industry believes that there are many landlords in Hong Kong who know that their premises are being rented out for use in the manufacture, sale or distribution of illegal products. Even where landlords may not know of this criminal activity because of the increased mobility of pirates, they should be obliged to undertake some level of policing of their premises to ensure that they are not being used for illegal conduct. The industry therefore supports the concept of closure orders as long as they reflect a balance between the obligation of the landlord to police its own premises and its need for some prior notice of illegal activity.

The Consultation Paper notes that retail pirates can be highly mobile, moving from one location to another on a frequent basis. While this is not the situation in every case, as evidenced by the operation of long-standing "black spots" like those in Wanchai and Mongkok, it is likely to be more the model of retail sales as enforcement is improved. The software industry believes that of the two closure order models set out in the Consultation Paper, Option 5 is clearly preferable. Landlords must be obliged to takes steps to prevent their premises from being used for criminal purposes and closure orders will provide them with the incentive to properly screen potential tenants. As retail pirates become more and more mobile they are likely also be far more obvious to potential landlords. We understand that they are currently trying to get very short leases (some as short as a week) from landlords - landlords who agree to such terms have little excuse that they did not know that the premises might be used for illegal purposes. Those who may not know can, as the Consultation Paper notes, include indemnification clauses in the leases they sign with questionable tenants. Closure orders should be effective for at least one year to provide the necessary incentives to landlords to police their premises.

Option 8(a): Imposing consumer liability - fixed penalty for possession of infringing articles

High software piracy rates in Hong Kong are in part attributable to the purchase by individuals of pirated products they know to be illegal. In most cases, the pirated software on sale in Hong Kong bears no resemblance to legitimate software products and cannot reasonably be claimed to be confusingly similar to legitimate products. Pirated product is often sold in compilation format, with multiple programs offered on a single optical disk sold in a jewel case or a simple plastic or paper sheath. Legitimate products are not sold in compilation format and in nearly every case are sold only in boxes with manuals and certificates of authenticity. As a result, we believe that in the overwhelming number of cases, those who buy pirated software in Hong Kong know they are doing so.

However, the software industry recognizes that a system of assessing a penalty for consumers who possess infringing articles could be complicated and involve questions about whether the consumers had bad intent when purchasing such products. As a result, we suggest that this proposal be further studied to determine whether it is appropriate.

Option 8(b): Imposing consumer liability - Create a smuggling offence at the border in respect of import or export of infringing articles

The import or export of pirated software by individuals (as opposed to commercial enterprises) could be a problem for the software industry in Hong Kong if the retail piracy problem is resolved. Consumers may be tempted to bring pirated product over the border from adjoining jurisdictions, as they are currently tempted to do with respect to luxury goods. We therefore would support this proposal.

Option 8(c): Imposing consumer liability - Recasting the offence of possession of infringing articles

Under the Copyright Ordinance as currently written, persons who possess infringing articles for the purpose of trade or business are subject to criminal sanctions. Current law therefore makes the unauthorized use of software in an ongoing business enterprise subject to criminal penalties. The software industry nevertheless acknowledges the opinion of some that compliance with the law would be enhanced if the law were modified to clarify that any person who possesses an infringing article other than for personal, domestic use commits a criminal offence. This slight modification would clarify the existing intent and effect of the law to impose criminal punishment on enterprises that make unauthorized use of software, while also making clear that personal, domestic use is not considered subject to criminal penalties. The software industry therefore strongly supports this proposal.

The Software Publishers Association
The Business Software Alliance