China orders Microsoft to halt some Windows sales

SHANGHAI Wed Nov 18, 2009 4:01pm EST

Customers shop at Microsoft's first retail store during the grand opening in Scottsdale, Arizona October 22, 2009.REUTERS/Joshua Lott

Customers shop at Microsoft's first retail store during the grand opening in Scottsdale, Arizona October 22, 2009.

Credit: Reuters/Joshua Lott

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SHANGHAI (Reuters) - Microsoft Corp has been ordered by a Chinese court to stop selling versions of its Windows operating systems that include fonts designed by a local company, citing a violation of licensing agreements.

The ruling, issued by Beijing's No. 1 Intermediate People's Court on Monday, may signal a new challenge for international and domestic software makers struggling with piracy in China -- newly assertive local firms ready to take their own IP claims to court.

"(Chinese firms) are going to think of China as a place to have their own litigation strategy, I think that's a trend that's coming," said Michael Vella, head of China litigation and intellectual property rights at Morrison & Foerster LLP, who predicts more lawsuits by local companies.

"We saw it in Taiwan. At first, Taiwanese companies were always on the defensive, and in recent years we have seen them initiating litigation."

In its ruling, the court said Microsoft violated the scope of licensing agreements between it and a Chinese technology company, Zhongyi Electronic, which designs Chinese character fonts.

Microsoft will have to stop selling the Chinese versions of its Windows 98, 2000, 2003 and Windows XP, according to the court. It is unclear when the ruling will take effect or how many copies are affected.

Microsoft said it will appeal the ruling.

"Microsoft respects intellectual property rights. We use third party IPs only when we have a legitimate right to do so," the firm said in a statement.

Analysts said the ruling is unlikely to affect Microsoft's long-term business outlook as only a small percentage of its total revenue comes from business in China.

"The majority of operating systems in the market today are illegal copies, and the ones that are Zhongyi-related have an even smaller share of the market," said Edward Yu, chief executive of a China-focused technology research firm Analysys International. "So I don't think it will have much impact on Microsoft's business."

CHANGING ROLES

China has long been the target for foreign firms seeking to protect their intellectual property. And China, under pressure from the U.S. government and the European Union, has increased enforcement of intellectual property laws.

Microsoft has faced its own issues at the hands of Chinese software pirates.

In August, a Chinese court jailed four people for spreading their bootleg "Tomato Garden" version of Microsoft's Windows XP program, in what the Xinhua news agency called the nation's biggest software piracy case.

And even before the highly anticipated launch of the software maker's Windows 7 operating system last month, Chinese bootleggers were already selling copies.

But roles are fast reversing as Chinese firms mature and become more aggressive in protecting their own designs from foreign firms.

"By winning this case against an internationally well-known company like Microsoft, it shows that China, although still a developing country, is taking positive steps to protect intellectual property rights," said Ling Xin Yu, the lawyer for Zhongyi, told Reuters.

Zhongyi Electronic said in a statement on its website that the agreements signed with Microsoft only permitted the company to use Zhongyi's intellectual property in Windows 95, but that the U.S. tech giant used it in subsequent versions of its Chinese Windows operating systems.

Research firm IDC estimates about 80 percent of software sold in China was pirated last year.

(Editing by Don Durfee and Ian Geoghegan)

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