Fake Windows, Ersatz Dos, Angry Uncle Sam

For months, the unlikely focus of software giant Microsoft Corp.'s wrath was an apartment building in a grim working-class suburb of Taipei. From there, a group of Taiwanese allegedly masterminded one of the largest and most sophisticated software piracy rings ever uncovered. Microsoft's three-month investigation culminated in January, when local police stormed the building and seized Fong Shu-gwong and 5,000 counterfeit packages of Microsoft's Windows and MS-DOS programs stacked throughout his apartment--including in the shower.

Fed up after hearing of such cases for years, U.S. Trade Representative Carla A. Hills acted on Apr. 29. She placed Taiwan on her Special 301 Priority Country list, which means that unless Taiwan cleans up its act, it may be subject to strong trade sanctions. Taiwan is simply "a center for copyright piracy," Hills declared in a statement. Between pirated software, books, records, and videos, Taiwanese ripoff artists robbed U.S. businesses of $370 million in sales last year, estimates the International Intellectual Property Alliance.

`NO WORSE.' But Taiwan's bustling computer industry is drawing the most fire. Af astounding 90% of all U.S. software sold in the country is counterfeit, estimates the Business Software Alliance, a trade group (table). Although the island's top computer makers are trying to break into the industry mainstream, there are hundreds of shoestring operations assembling PCs. And apparently many of them simply load illegal copies of software onto PC hard disks before sealing the boxes for export. Suspecting as much, U.S. officials had demanded in April to inspect all computers leaving Taipei. When the Taiwanese government balked, Hills retaliated with her Special 301 ruling. Now, Taipei has a year or so to clamp down on the pirates. If it doesn't, the U.S. could impose high tariffs on Taiwanese imports, most likely its PCs.

The Taiwanese complain that the move was unfair. Huang Yi-feng, director of legal services for the Taipei Computer Assn. claims that only about 5% of the PCs that Taiwan ships to the U.S. contain counterfeit software. "We're no worse than any other country," says Huang.

Microsoft and other U.S. software makers disagree. They were stunned by the sophistication and scope of the forgery. After nabbing Fong, investigators were led to production sites in Taiwan, Hong Kong, and China. They found flawless copies of manuals, diskettes, and packaging, including the metallic hologram stickers meant to foil copycats. "The quali-ty of the counterfeitis remarkably high," says David D. Curtis, Microsoft's associate general counsel. The phony holograms were traced to a Chinese government-owned research institute in the special economic zone of Shenzhen, near Hong Kong. It had already filled orders for 450,000 holograms and had orders for 3 million more. That represents about $150 million in lost revenue to Microsoft, Curtis estimates.

Software makers aren't the only businesses that say they are victims of Taiwan's lax enforcement of copyright protection. In addition to record companies and film studios, Nintendo of America claims that more than 40 million pirated video games were sold last year, most containing program chips forged by Taiwan's United Microelectronics Corp. "It is incontestable," says Lynn E. Hvalsoe, Nintendo of America's general counsel. UMC's Chairman Robert Tsau denies it.

OWNING UP. Still, Taiwanese officials say they've made progress. A decade ago, stores blatantly copied and sold U.S. books. "Before, we didn't care, but now we are actively going about changing things," says Wu Hueih-meei, secretary general of the Bureau of Standards. Her office helped prepare a set of new intellectual property laws, part of an effort to bring Taipei in line with international standards. But the bills have languished as Taiwan's legislators wrangle over constitutional reform and other issues.

Pressure for reform is building from some business leaders. "We need to get rid of this small number of counterfeiters," says Kenneth Chiang of Loung Hwa Electronics, which exports $90 million worth of circuit boards to the U.S. annually. "They affectthe image of the whole Taiwanindustry."

As Taiwan prepares for new talks with the U.S. this month, many here hope that retaliatory U.S. action can be averted. Microsoft and other software makers aren't waiting, though. In addition to the raid on Fong, the company filed a lawsuit in April against BEC Computer Co., a Taiwan company it accuses of copying Windows and MS-DOS. And Microsoft is particularly eager to track down the party who ordered 3 million Microsoftholograms from the factory in Shenzhen. "We never found that individual," says Microsoft attorney Alix Parlour. "But we will."

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