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On June 22, 2011, the Stolen or Misappropriated Information Technology Law took effect in the state of Washington. The law protects US companies from unfair competition by making it illegal for manufacturers to use pirated hardware or software in the production and commercialization of products sold in the state. The law is designed to specifically target foreign manufacturers that export and sell their products in the United States. Therefore, the law could have an important effect on Chilean exporters.

It is important to note that the "stolen or misappropriated IT" need not actually be incorporated into a product sold in Washington State; a manufacturer is liable under the law if it uses pirated software in any part of its business operations, including in its inventory, logistics, or accounting systems.

Washington is not the only state fighting unfair competition resulting from piracy. Louisiana has already passed a very similar law and other states are in the process of implementing regulations including Arizona, California, Connecticut, Indiana, Kentucky, Massachusetts, Missouri, North Carolina, and Oregon.

Of course, many manufacturers are outside the jurisdiction of Washington State, but the law also provides plaintiffs with a cause of action for damages against third parties (distributors and retailers) who generate more than US$50 million in annual revenues, have a contractual relationship with the offending manufacturer, and sell the offending products in Washington.

These third parties can avoid being subject to damages by obtaining a written letter from the manufacturer stating that it has not used pirated IT in its production processes. Therefore, Chilean companies need to be prepared for US buyers that require strict compliance with local IP laws as a condition to sell their products in the United States.

As a condition in order to file a lawsuit against a manufacturer, the law requires that the IT owner give written notice. Failure by the manufacturer to either disprove the allegations or stop using the offending software within 90 days could make them liable under the law. 

A lawsuit can be brought either by the Washington Attorney General or a private entity that sells directly competing products. To prove it has been damaged by the sale of the offending products, a company must show it does not use stolen IT in its own operations and that the retail price of the software or hardware in question is US$20,000 or more.

Some products and services are excluded from the law including products used for medical or medicinal purposes, food and beverage products, restaurant services, products copyrighted under US law and certain components of products for which there are no comparable substitutes.

To understand how the law could potentially affect a Chilean company, let’s assume that a Chilean manufacturer of a popular and unique item of furniture uses a pirated copy of Excel to track orders, shipments, or payments regarding its products and those products are supplied to a retailer, such as Home Depot, in Washington State.

In this situation, the Chilean company is in violation of the law and can be sued. If it does not appear before the court in Washington State, which is the more likely scenario, then the distributors or retailers that contracted with this company to acquire the furniture can also be sued for up to US$250,000 and the products themselves could be seized.

Although distributors and retailers in the United States can defend themselves, as explained above, the seizure of products or a potential injunction could dramatically affect the whole operation and create a major delay in the sale of the furniture. While the Chilean company cannot be brought before a court in Washington, or eventually another state, the case described above shows the impact that such a case could have on its commercial operations.

As a result of this law, Chilean companies that manufacture and export products to the US market should now more than ever pay close attention to their IT practices. Some common guidelines should include: creating a code of conduct regarding IT practices and carrying out periodic audits to make sure that software and hardware comply with IP laws and regulations. Companies should also train key employees and executives regarding good IT practices.

Esteban Elias is legal counsel for Microsoft Chile and a law professor at the Central University in Santiago