Introduction

As the eyes of the world turned to Beijing for the 2008 Olympic Games, Chinese authorities on August 15, 2008 arrested a software pirate.  Hong Lei, the creator of Tomato Garden, an operating system and software program based on Microsoft’s ubiquitous Windows XP operating system, was taken into custody.

Hong Lei did not sell illicit copies of Windows for personal gain; he gave them away for free.  He faces fines and up to seven years in prison because he received income from ad solicitors.  China’s treatment of Hong Lei may provide valuable insight into how China will treat copyright infringers in the future. 

Some Chinese observers have suggested that the Chinese government look to United States law to determine whether Hong Lei is guilty of copyright infringement, and propose that two decision from the Northern District of California (Microsoft’s home court), prevent any United States district court from finding Hong Lei liable for his actions.¹

However, analysis of United States copyright law and the Netbula cases establish that Hong Lei’s conduct most likely would be infringing.  A review of how a U.S. citizen who distributed a Tomato Garden-like program would be treated in the U.S. is set forth below.

Background

China has experienced virtually unprecedented economic growth over the past several decades as it has opened its borders to foreign investment.  China’s economy now has the second largest Gross Domestic Product in the world when calculating using purchasing power parity. ² As China’s economy has grown, its population has become wealthier, and is coming to represent the single largest market in the world.

The consequences of foreign corporations manufacturing their goods in China, and then marketing those same goods to China’s population, were twofold: Chinese people learned to make those goods, and Chinese demand for those same goods grew.  Piracy of trademarked and copyrighted goods became both technologically possible and financially lucrative.  Computer software was one of many products that became especially profitable to copy and distribute to buyers around the world.

However, as Chinese manufacturers came to create and own more of their own intellectual property, and the World Trade Organization and various foreign companies pressured China to more aggressively and effectively pursue pirates, the Chinese government eventually began more significant efforts to combat piracy within its borders.

Starting in the early 1990’s, the Chinese government approved a battery of laws and regulations to prevent, or at least decrease, computer software piracy.  China’s first law towards curbing piracy, the Copyright Law of the People’s Republic of China (the “Copyright Law”) was adopted on September 7, 1990, and implemented on June 1, 1991.  The Chinese government approved regulations to enforce and implement the Copyright Law on May 24, 1991, and amended the regulations on October 27, 2001.  Additional, legislation geared specifically towards protecting computer software rights took effect as early as October 1991, and China’s Regulation on Computer Software Protection to implement was issued in January 2002, shortly after the legislation was amended in December 2001.  China also ratified the Berne Convention for the Protection of Literary and Artistic Works in 1992.

Furthermore, unlike in the United States, China tends to rely on government action and criminal statutes such as Section 7 of the Criminal Law of the People’s Republic of China.  It punishes intellectual property crime with penalties including fines and up to seven years in prison, and the Administrative Penalties in Copyright Cases, which went into effect on September 1, 2003.

Nonetheless, China is still faced with a reputation for cheap knockoffs and illicit copies of CDs, DVDs, and computer software in its domestic market.  China’s treatment of Hong Lei and Tomato Garden may illuminate China’s next step in its journey towards addressing piracy within its borders.

Tomato Garden

Microsoft and its Windows operating system was the best known of those systems with more than 80% of the PC market worldwide.  However, despite the rising wealth of the Chinese population, the price of Windows was apparently still more than many people were willing to pay. 

Enter Hong Lei and Tomato Garden, who offered a system for free. Chinese computer users had been using cracked operating systems well before Hong Lei first established Tomato Garden in 2003 to offer free downloadable software to enhance the latest version of Windows, Windows XP. ³ However, Hong Lei’s free, downloadable version of Windows XP, which he called Windows XP Tomato Garden, became the most popular operating system in China. ⁴ Tomato Garden’s former website, www.tomatolei.com, experienced large volumes of traffic, which helped generate ad revenue. Id.; Wang Yu, Author of ‘Tomato Garden’ XP Squashed, Beijing Today, September 26, 2008, at Business 6. The number of Tomato Garden downloads is reportedly in the tens of millions. Yu, supra.

Tomato Garden removed some components of Windows, including components designed to prevent consumers from sharing copies of Windows without paying for them, and added some programs that improved its speed and usability when compared to the original.  Id.

However, China’s love affair with Tomato Garden was abruptly interrupted.  Three years after Windows XP Tomato Garden’s first downloads, the Business Software Alliance (“BSA”) contacted three Chinese ministries regarding Tomato Garden. ⁵ Shortly afterward, on August 15, 2008, Chinese officials arrested Hong Lei for infringing Microsoft’s copyrights. Id.

Hong Lei’s arrest has been fraught with controversy.  Some observers have pointed out the “convenient” timing of the arrest, which occurred during the 2008 Summer Olympics in Beijing.⁶ Others accurately observe that Microsoft is a key member of the BSA, and that the BSA is merely a mouthpiece for Microsoft in the copyright infringement arena.  Xing,  supra.  Others believe that Microsoft used Tomato Garden as a marketing tool, and deliberately waited years before filing a government complaint to increase the number of Windows XP users before cutting out Tomato Garden and other cracked copies.  Bin, supra.

Further, an opinion is circulating that because the arrest was prompted by an American corporation, the Chinese courts should treat the American copyright holder just as the United States courts have treated Chinese copyright holders. ⁷ Which begs the question: what kinds of charges and claims would Hong Lei face, and would he be guilty or liable, if charged under United States law?

Copyright remedies under United States Law as compared to remedies under Chinese Law

Like Chinese law, the Copyright Act in Chapter 5, Title 17 of the United States Code (the “Copyright Act”) provides for both civil remedies and criminal penalties for copyright infringement.

Under Section 502(a), a copyright owner may obtain a temporary or permanent injunction against the infringer.  17 U.S.C. § 502(a).  Section 504(a)(1) permits the owner of the copyright to recover actual damages and any profits attributable to the infringement.  17 U.S.C. § 504(a).  The copyright owner must also bring the action within three years of finding out about the infringement.  17 U.S.C. § 507(b).  These provisions are similar to Article 46 of the Copyright Law of the People’s Republic of China, which provides for civil remedies including cessation of the infringing act and compensation for damages.  The statute of limitations for a copyright action in China is two years, although if it is a continuing infringement, then the suit may be brought after the statute has run, although damages are limited to the two years prior to the action being brought.

Examining the criminal penalties under the Copyright Act also reveals similarities with Chinese law.  Section 506(a) of the Copyright Act makes certain infringing acts punishable as crimes:
(a) Criminal Infringement. —
(1) In general. — Any person who willfully infringes a copyright shall be punished as provided under section 2319 of title 18, if the infringement was committed —
(A) for purposes of commercial advantage or private financial gain;
(B) by the reproduction or distribution, including by electronic means, during any 180-day period, of 1 or more copies or phonorecords of 1 or more copyrighted works, which have a total retail value of more than USD 1,000; or
(C) by the distribution of a work being prepared for commercial distribution, by making it available on a computer network accessible to members of the public, if such person knew or should have known that the work was intended for commercial distribution. 17 U.S.C. § 506(a).

In turn, section 2319 of title 18 provides for prison sentences of a maximum of five years for first time offenders if the infringement was for commercial or private financial gain, or a maximum of three years if the infringement was not for commercial or private financial gain.  18 U.S.C. §§ 2319(a)-(d).  These maximum sentences become ten years or six years, respectively, for second or multiple offenders.  Id.  The charges must be brought within five years of the infringing activity.

Similarly, Article 217 of the Criminal Law of the People’s Republic of China sets forth a maximum sentence of three years when an infringer copies and distributes computer software without permission “for the purpose of reaping profits” and gains a “large” amount of illicit income.  Criminal Law of the People’s Republic of China, Article 217.  This sentence becomes a minimum of three years and a maximum of seven years when “the illicit income is huge” or when “particularly serious circumstances” are present.  Id.  “Particular serious circumstances” and “huge” income are not defined. ⁸

Therefore, under both Chinese and United States law, infringers face both civil and criminal penalties if the motive of the infringement was for financial gain.  However, under United States law, it is irrelevant whether the infringer ever earned any actual income.  A civil infringer can be held liable for the copyright owner’s actual damages, or statutory damages if no actual damages are present, required to pay the copyright owner’s attorneys’ fees, and the infringing goods can be impounded and destroyed.  17 U.S.C. §§502-505.  Actual damages can be shown even if the infringer received income from distribution of infringing goods by, for example, showing lost sales attributable to the infringement.  17 U.S.C. § 504.  A person charged with criminal copyright infringement also need not have earned income from the infringement, so long as the purpose of the infringement was criminal gain.  18 U.S.C. §2319.

The United States statutes impose criminal penalties, albeit lesser ones than China, even if the motive was not financial gain. 17 U.S.C. §§ 506(a)(1)(B)-(C); 18 U.S.C. §§ 2319(c)-(d).  Prison sentences for criminal infringement require only “willful” conduct, not the intent to earn money.  17 U.S.C. § 506(a).
In practice, the broad scope of civil remedies seem to make criminal prosecution for copyright infringement rare in the U.S.   Relatively effective civil remedies and relatively short criminal sentences for infringement have discouraged criminal prosecution and encouraged civil litigation in U.S. Courts.  The BSA, for example, has filed many more civil suits against software pirates in the U.S. than it has successfully encouraged criminal prosecutions there.  The U.S. has also just enacted new legislation to strengthen the criminal penalties against pirates, but whether it will encourage more criminal prosecution is uncertain.  ⁹

However, the landscape surrounding the Tomato Garden situation is unique.  The amount of money earned by Tomato Garden is most likely not significant to Microsoft.  However, if Hong Lei is prosecuted by the Chinese government under China’s criminal statute, Tomato Garden will be shut down and a very public precedent will be set.  Further, Microsoft will not have to enter the fray except as an interested party complaining to the Chinese government.

Hong Lei’s liability under United States and Chinese Law

Hong Lei’s activities infringe on Microsoft’s copyright under U.S. law.  In basic terms, Hong Lei distributed an enhanced copy of Windows XP for free.  Even if Hong Lei made changes to the software before distributing it, the end result, Windows XP Tomato Garden, is still considered a derivative work under United States law.  Therefore, the real question is not whether Hong Lei infringed Microsoft’s copyright, but rather whether the types of criminal penalties he will face are different under United States and Chinese law.

As described above, the Copyright Act and its corresponding penalties statute contemplates up to three years imprisonment for copyright infringement even if financial gain was not the motive for the infringement. 18 U.S.C. §§ 2319(a)-(d).  The Copyright Act also provides for up to five years imprisonment if financial gain was the motive, even if no gains were actually made.  Id.

Under the Tomato Garden facts, it is difficult to determine if Hong Lei infringed Microsoft’s copyright for financial gain. However, his eventual income from ad solicitors indicated that he contemplated making income from Tomato Garden.  Even if he did not originally crack Windows XP for financial gain, he most likely continued to distribute Tomato Garden for financial gain after he entered into agreements with the ad solicitors for advertisements from his webpage, and for a certain commission for each user that signed up for Yahoo! China and Eachnet due to the inclusion of certain plug-ins to Windows XP Tomato Garden.  Therefore, Hong Lei would most likely face the higher five year maximum imprisonment in the U.S.

In any event, so long as Hong Lei is found to have “willfully” committed copyright infringement, he would face a maximum of three years in prison under United States law.

These facts may justify a prison sentence for Hong Lei under Chinese Law as well.  Actual earned income and the intent to earn profits appear to be prerequisites for prison sentences under Article 217 of Section 7 of China’s Criminal Law.  Even with these requirements, the Chinese government may be able to prove that both these prerequisites exist, and Hong Lei will face three to seven years in jail under Chinese law.

Ad solicitors’ liability under United States Law

Hong Lei’s income appears to consist wholly of advertising revenues.  Since these revenues are the basis for Hong Lei’s criminal penalties, it is worth considering whether the advertisers would also be liable for Hong Lei’s infringement.

United States law provides for liability for indirect copyright infringement. ¹⁰ “One infringes contributorily by intentionally inducing or encouraging direct infringement, and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it.”

While there is some case law finding liability for indirect copyright infringement for defendants that advertise the infringing product, there does not appear to be an analogous case where the defendant advertised on the infringing product itself.

Whether Yahoo! China and Eachnet are vicariously or contributorily liable for Hong Lei’s infringement will hinge on the findings of the Court.  Yahoo! China and Eachnet purportedly made payments to Hong Lei for 1) advertising on Hong Lei’s website, and 2) for each user that signed up for their respective services after installation of Windows XP Tomato Garden that included plugins for both companies.

If the Court determines that these activities amount to inducing Hong Lei to infringe Microsoft’s copyright, or that the companies profited from Hong Lei’s infringement while failing to stop him, then Eachnet and China! Yahoo might also be liable under United States law.

The effect of the Netbula cases

It has been suggested that the Chinese courts should use United States precedent that is allegedly harmful to Chinese copyright holders to hold Hong Lei innocent of any infringement charges.¹¹ In other words, Chinese courts should protect Chinese who infringe on American copyrights, just as United States courts purportedly protect Americans infringing on Chinese copyrights.  Id.  Proponents of this course of action believe the Netbula cases provide a safe haven for the American defendants, and would provide a safe haven for Hong Lei because they establish that the owner of the copyright must prove that the infringing party actually read any licensing restrictions in order to hold the infringing party liable for copyright infringement.  Id.  Therefore, because Microsoft would never be able to prove that Hong Lei actually read any licensing restrictions on Windows XP, Hong Lei would not be liable for copyright infringement.  Id.  However, their analysis is flawed.

The Netbula cases are factually similar to each other.    In both, the defendants obtained a license to distribute software created by Netbula.  Id.  When the defendants allegedly exceeded the scope of the licenses, Netbula sued for copyright infringement.  Id.  In both cases, summary judgment was entered against Netbula, the copyright holder, and attorney’s fees awarded to the allegedly infringing companies.  Id.

However, one crucial fact distinguishes the Netbula cases: in both cases, Netbula granted a license to the defendants to copy its copyrighted software.  Netbula I, 516 F.Supp.2d at 1151; Netbula II, 2008 U.S. Dist. Lexis 4119, *8.  Therefore, the defendants’ liability in both cases hinged not on whether a license was ever issued, but rather on whether the defendants exceeded the scope of the license in question.  Id.  As the court in Netbula I stated, “Because it is not in dispute that the 1998 Netbula license existed, in order to meet its burden in this case, Plaintiff must prove that Defendants exceeded the scope of the license.”  Netbula I, 516 F.Supp.2d at 1151.  The Netbula II court clarified, “Where, as here, the existence of a license is not in dispute, the critical question is the scope of the license.”  Netbula II, 2008 U.S. Dist. LEXIS 4119, *7-8.  Neither court made any ruling regarding the liability of a copyright infringer where no license ever existed. 

Therefore, unless Hong Lei is able to prove that Microsoft granted him a license, albeit a restricted one, to copy and alter Windows XP the Netbula cases are irrelevant.  Further, under United States law, the existence of a license will be considered an affirmative defense; therefore, Hong Lei would have the burden of proving the existence of a valid license at trial. Bourne v. Walt Disney Co., 68 F.3d 621, 631 (2d Cir. N.Y. 1995). (“Bourne is correct insofar as it contends that the possession of a license by an accused infringer traditionally has been characterized as a matter of affirmative defense.”)

Geographical parallels notwithstanding, the Netbula cases simply have no bearing on whether Hong Lei would be liable in United States federal courts for civil copyright infringement.

Hong Lei’s potential defenses under United States Law

Although the Netbula cases offer no relief for Hong Lei, Hong Lei could attempt to offer certain affirmative defenses that are available under United States law.  Some applicable affirmative defenses that he could raise are all based on Microsoft’s failure to timely complain about his infringing conduct until 5 years after it began.  Generally, these defenses would be available only for civil copyright infringement, and could not be raised in a criminal copyright case.

First, Hong Lei could seek to raise the three year statute of limitations under 17 U.S.C. § 507(b).  Under this statute, Microsoft generally would be required to file suit against Hong Lei within three years of his infringing conduct.  However, each act of infringement is deemed a separate wrong that begins the running of a new statute of limitations.  Thus, in civil court Hong Lei might be able to limit damages to those occurring within 3 years of the date suit was filed, but he could not raise the statute of limitations as a complete defense.  The five year statute of limitations for criminal proceedings is most likely inapplicable to this case.

Hong Lei could raise the defense of laches.  Laches may be invoked in a civil copyright action where the plaintiff has unreasonably and inexcusably delayed in prosecuting its rights to the material prejudice of the defendant.  Although some federal courts have held that the defensive laches may not be interposed in a copyright infringement suit, Lyons Partnership, LP v. Morris Costumes, Inc., 243 F.3d 789, 798 (4th Cir. 2001), other courts have held that laches may be raised as an affirmative defense to civil copyright infringement.  Peter Letterese & Assoc., Inc. v. World Institute of Scientology, 533 F.3d 1287, 1320 (11th Cir. 2008).

To assert laches, Hong Lei must show: “(1) a delay in asserting a right or claim; (2) that the delay was not excusable; and (3) that there was undue prejudice to the party against whom the claim is asserted.” Kason Indus. v. Component Hardware Group, Inc., 120 F.3d 1199, 1203 (11th Cir. 1997) (citing AmBrit, Inc. v. Kraft, Inc., 812 F.2d 1531, 1545 (11th Cir. 1986)).  However, “[t]he effect of laches is merely to withhold damages for infringement which occurred prior to the filing of the suit.”  Studiengesellschaft Kohle GmbH v. Eastman Kodak Co., 616 F.2d 1315, 1325 (5th Cir. 1980).  Therefore, Hong Lei would still have to face injunctions and regurgitate profits earned after the civil suit is filed.

Hong Lei may also argue that Microsoft’s claim is barred by the doctrine of estoppel.  Estoppel “arises only when one has so acted as to mislead another and the one thus misled has relied upon the action of the inducing party to his prejudice.”  Id.  Hong Lei would have to show: “1) the plaintiff had knowledge of defendant's infringing acts, 2) the plaintiff either intended that defendant rely on his acts or omissions or acted or failed to act in such a manner that defendant had a right to believe that it was intended to rely on plaintiff's conduct, 3) the defendant was ignorant of the true facts, and 4) the defendant relied on plaintiff's conduct to its detriment.” Dallal v. New York Times Co., 2006 U.S. App. LEXIS 5171 (2d Cir. N.Y. Feb. 17, 2006).  A successful estoppel argument would prevent Microsoft from obtaining an injunction or from collecting damages. ¹² It would seem difficult for Hong Lei to successfully assert such a defense as the facts present here.

Finally, Hong Lei may assert the similar affirmative defenses of waiver and abandonment.  In U.S. copyright law, waiver “occurs” only if the copyright owner intends to surrender rights in his work.  A&M Records, Inc. v. Napster, Inc., 239 F3d 1004, 1026 (9th Cir. 2001.) ( “Waiver is the intentional relinquishment of a known right with knowledge of its existence and the intent to relinquish it.”  )United States v. King Features Entm't, Inc., 843 F.2d 394, 399 (9th Cir. 1988).  Similarly, to establish abandonment, the defendant must demonstrate: "(1) an intent by the copyright holder to surrender rights in the work; and (2) an overt act evidencing that intent.” Paramount Pictures Corp. v. Carol Publ'g Group, 11 F. Supp. 2d 329, 337 (S.D.N.Y. 1998).  Thus, Hong Lei would have to introduce evidence that Microsoft intended to give up its rights in Windows to prevail on this defense.  It is unlikely that Hong Lei would be able to successfully assert waiver or abandonment in a civil copyright action in the U.S.

Conclusion

Change is often difficult, and changing intellectual property enforcement practices will likely be painful to both companies that have built their business on unauthorized use of others’ intellectual property and consumers who wish to buy such goods at the lowest price.  However, protecting intellectual property is vital to international trade, and as China’s own intellectual property grows, the value of that property to China’s economy will grow, and the need to protect that property will grow more obvious.

Hong Lei’s arrest thus may be unprecedented in China, but his actions would be infringing in the U.S. and would appear to be in China.  For China to take its place among the major trading nations of the world, it will need to prosecute Hong Lei and others like him who builds businesses on the intellectual property of others.  Failure to do so will hinder both China’s international trade and the development of its own intellectual property, to the detriment of both China and the world.

Endnotes:

1. See Netbula, LLC v. Symantec Corporation, 516 F.Supp.2d 1137 (N.D.Cal. 2007) (“Netbula I”) and Netbula, LLC v. Storage Tech. Corp., 2008 U.S. Dist. Lexis 4119 (N.D. Cal. 2008) (Netbula II”) (collectively, the “Netbula cases”).
2. See World Economic Outlook Database, International Monetary Fund, April 2008.
3. See David Kirkpatrick, How Microsoft Conquered China, Fortune, July 23, 2003. 
4. See Xiang Bin, No More Windows XP From Tomato Garden, China.org.cn, October 15, 2008.
5. See Wang Xing, Rotten Tomatoes, China Daily, September 22, 2008, at 9.
6. See Writer of Windows XP ‘Tomato Garden’ Detained, sina.com, August 20, 2008.
7. See Agency of Intellectual Property Protection of the People’s Republic of China, Ninth Circuit Precedent Exonerates Chinese Software Hacker, September 10, 2008.
8. See id.
9. See Senate Bill S.3325 - Enforcement of Intellectual Property Rights Act of 2008, passed September 28, 2008.
10. See Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930-931 (2005).
11. See Agency of Intellectual Property Protection of the People’s Republic of China, supra.
12. See Studiengesellschaft, 616 F.2d at 1325.

About the author:

Mark S. Lee is a partner at the Los Angeles office of Manatt, Phelps & Phillips, LLP and specializes in intellectual property litigation.

Borchien Lai is an associate at the Los Angeles office of Manatt, Phelps & Phillips, LLP and focuses on general litigation.