Microsoft sues internet café chain in Guangdong

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Microsoft sues Tonecan Network Communication
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Microsoft Corporation is suing Tonecan Network Communication, operator of an internet café chain in Guangdong province, for illegal use of its Windows XP operating system, Chinese media report. Tonecan is believed to be the largest internet café operator in the manufacturing and outsourcing city of Dongguan, with around 5,000 computers.

Just a day before the court date of 12 May, compensation claims filed by Microsoft with the Dongguan Intermediate People’s Court were increased from RMB600,000 (US$88,000) to RMB1.58 million. The court decided to postpone hearing the case to allow “enough time to gather evidence”.

Should Tonecan ultimately lose the case, more internet café operators are likely to receive letters from lawyers, industry observers predict.

In a previous attempt to reach an out-of-court settlement of the dispute last year, Microsoft and the Dongguan Internet Service Association asked internet café owners to subscribe to standard purchase terms on Microsoft products. Microsoft said it wanted to eliminate the use of counterfeit software within five years.

Under the plan, a café with 200 computers would have paid Microsoft almost RMB870,000 for Windows XP, with additional payments for server and office software. But three rounds of negotiations between Microsoft and local industry representatives failed to agree a compromise on the price. Total royalties paid by the more than 1,000 internet cafés throughout the city would have exceeded RMB100 million, which owners said would force up to a third of them to close.

During the past two years, while promoting its plan for legal products, Microsoft has investigated 26 local operators and collected evidence of infringement. Defendants in such cases often cite Microsoft’s “monopoly position” and “overpricing” in their defence. Tonecan owner Huang Peihong said Microsoft could have used technical means to prevent or curb piracy, but it had tolerated piracy in order to expand the market for its products, according to a report on a website belonging to Southern Metro Daily News. “It waits until users are accustomed to using pirated products to file a claim for infringement,” Huang said.

Yu Guofu, an intellectual property lawyer with Sam & Partners law firm in Beijing, said on his blog that it was not improper for Microsoft to initiate legal proceedings against unauthorized commercial use of its copyrighted software.

However, Microsoft’s prominence in computer software also raises anti-trust concerns. Deng Zhisong, an attorney with T&D Associates, told China Daily that “laws do not prohibit a monopoly that results from natural market competition. Only if it abuses its dominant market position is the company suspected to violate the anti-trust law”.

Deng cited a recent case against Baidu, China’s most popular internet search engine, in which the court ruled there was not enough evidence to prove the company occupied a monopoly position. (See China Business Law Journal volume 1 issue 2, February 2010, Baidu beats Renren in second dominance case.)

“Rather than just making claims based on estimates or even widely accepted knowledge that a company enjoys a monopoly position, you need evidence to prove it,” Deng said, adding that unreasonably high prices were a benchmark used in China’s anti-monopoly law. Factors as such as costs and the market prices of similar products should be taken into consideration in judging whether transactions were unfairly priced, he said, noting that the National Development and Reform Commission is drawing up new regulations to specify what situations constitute unjustified overpricing.

In late April, Microsoft was the winner in a legal action against Dazhong Insurance in Shanghai and received RMB2.17 million in compensation, the highest damages it has been granted by Chinese courts so far. The company also won a resounding victory last August in a lawsuit against Tomato Garden, a website that generated advertising revenues by offering free pirated software. Four men were sent to prison and heavily fined for distributing pirated versions of Microsoft’s Windows XP and other computer programs over the internet.

Meanwhile, Microsoft has appointed Mark Cohen, previously of counsel at Jones Day’s Beijing office, as its director for international intellectual property. Before joining Jones Day in August 2008, where he focused on intellectual property and technology transfer matters, Cohen served for seven years as senior IP attaché at the US Embassy in Beijing. He was also a legal adviser for the Office of International Relations of the US Patent and Trademark Office, where he was involved in bilateral patent and trademark prosecution, internet copyright enforcement, anti-monopoly law, domain name dispute resolution, standards-setting and technology transfer initiatives.

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