In 1968, Japan surpassed West Germany and became the second largest producer of goods and services in the world after the United States. In that same year, the U.S. Electronic Industries Association (EIA) brought an anti-dumping lawsuit before the Department of the Treasury, claiming that Sony and ten other Japanese manufacturers were selling televisions in the US at prices lower than in Japan, causing U.S. manufacturers to record severe losses. At about this time, economic friction between Japan and the United States came to a head.
Since many U.S. consumers at the time considered Sony color televisions too expensive, it seemed contradictory to include Sony's name in the lawsuit. However, Sony was included because of a US policy classifying products by their country of origin. Basically, Japan as a country had been named in the anti-dumping suit so all Japanese manufacturers of color TVs were automatically included.
In 1971, soon after the Treasury decided that the case against Japanese makers had merit and that they would have to face anti-dumping charges, Sony received a letter stating that it was not under suspicion for any illegal activity. Sony was the only Japanese maker to receive such a notice. A provisional announcement confirming Sony's status was subsequently made in August 1974 and a formal announcement was made in February of the following year.
Even with this reprieve, Morita and Iwama recognized that the potential for trouble existed, and quickly took preventative measures. They collected evidence that clearly showed that anti-dumping allegations against Sony could not be substantiated, and presented their case directly to the US government.
Morita and Iwama had taken it upon themselves to visit the United States to gain a deeper understanding of the country's social and legal fabric, and the concept of "fair business." Morita and Iwama's considerable experience abroad eventually paid off handsomely.
Sony received notice from the Treasury in 1975 officially absolving it of any wrongdoing. It had been seven years since the filing of the anti-dumping suit and despite the notice, Sony had been dragged into the proceedings with the other Japanese makers. Eight more years would pass before the case against them was finally settled.
In 1972, construction was completed on Sony's color television factory in San Diego. However, even with the plant operating smoothly, Morita would frown with concern at any mention of San Diego. Morita was unhappy with California's unitary state tax system. California promoted its position as the closest of the lower 48 states (excluding Hawaii and Alaska) to Japan and emphasized its many attractive locations including Silicon Valley and Los Angeles which would make ideal bases for Japanese companies in the US. While he recognized that Sony was responsible for paying a certain level of tax, Morita believed that California's tax system was unjust. Its "Unitary Tax System" was one of the oldest in the US, dating back to the nationwide expansion of US railway companies in the mid-19th century.
Under a unitary tax system, tax authorities calculate the amount of tax payable by taking into account not only the income returned by the local company, but also by its parent and affiliated companies regardless of whether or not such income is earned within the jurisdiction state.
For subsidiaries of foreign companies, this necessitated the arduous and expensive task of having to calculate and submit group sales figures for global operations. The system operated in such a way that a local company might actually record a net loss, but end up having to pay substantial taxes due to income earned by overseas affiliates. Criticism was increasingly leveled at the system because it ignored national borders, and the tax was a deterrent to foreign companies considering operations in the United States.
In April 1977, California Governor Jerry Brown visited Japan to attract investment from automobile makers and other manufacturing companies. (In 1971, following the changing fortunes of the dollar in foreign exchange markets, the US government was trying to increase exports to Japan, while encouraging overseas investment from Japan). The curt response he received from all quarters was that the Japanese investors were not interested in California as long as the unitary tax system was in force. Governor Brown did not fully comprehend the complaints being made of the system. It was suggested that he should speak with Sony president Morita, who had been conducting business in California since 1972. Morita's reply was blunt: "The unitary tax system is unjust. It stands in sharp contrast to your appeals for companies to invest in California and we are losing all interest in further investment in your state. In fact, as the situation currently stands, it is probably better for us to cease our operations in California altogether." Governor Brown returned to California, shocked at Morita's response.
At that time, the unitary tax system was gaining ground throughout the United States. Although originally applied to only industries in California, the tax now applied to several industries in other states. To Morita, the unitary tax was a troublesome issue. So, being a man of action, he decided that the corporate sector would have to take the lead in rectifying this unfair system.
In November 1977, Morita designated Sadami (Chris) Wada of Sony Corporation of America as Sony's in-house lobbyist.
Lobbies are a prominent feature of the US political process. Lobbyists represent various industries, citizens groups, and overseas governments. Their mission is to skillfully promote the causes they represent among government officials. Lobbyists also work outside of the sphere of government while generating support from the business and public sectors for various causes, such as preventing the passage of legislation that would be detrimental to their clients' interests.
Morita intended to target both the federal and state governments in his campaign to have the unitary tax rescinded. He had gained a deep understanding of US society. He knew that the US was a democratic country where voters had the final say, and wanted to explain the Japanese position to people at the grass-roots level. He did not want to rely solely on hired lobbyists. While directing the activities of the Japan Federation of Economic Organizations (Keidanren), Morita asked Wada to begin Sony's lobbying campaign.
In autumn 1980, together with Kyocera Corporation Chairman Kazuo Inamori, Morita formed a Unitary Tax Committee to lobby both the Japanese and US governments. The Electronic Industries Association of Japan (EIAJ) and the Keidanren also threw their weight behind the movement, appealing to US federal and state governments.
These two organizations wrote letters to the Department of the Treasury and the President's Office; and they made statements on visits to the US arguing that the unitary tax system defied tax and trade treaties between Japan and the United States that recognized there should be no double-taxation of income. The unitary tax did in fact act contrary to this principle, presenting a substantial non-tariff barrier and posing a real threat of double taxation to Japanese companies with subsidiaries in those states where it was in force.
With the statement, "This is a problem that affects the relationship between our two countries and we would like the Japanese government to take positive steps to resolve it," Morita tried to stir the cautious Japanese government into adopting a more decisive approach to resolving the unitary tax problem.
Thanks to Morita's efforts, Japanese government officials began to openly express their discontent with the unitary tax system and asked their US counterparts to take steps to rectify the situation. A growing number of European countries joined the movement to have the unitary tax system abolished, and the movement quickly gathered momentum worldwide. It was even included on the agendas at meetings between leaders of industrialized nations.
President Reagan was placed in a difficult position after receiving letters from Prime Minister Yasuhiro Nakasone and British Prime Minister Margaret Thatcher expressing their opposition to the unitary tax system. On the one hand, Reagan wanted to attract as much foreign investment as possible to his home state of California. However, as President, it was his duty to defend individual states' rights to independence. At best, he could only put forward a recommendation that states reconsider their position. What made matters even worse was that President Reagan himself had introduced the unitary tax system during his term as Governor of California.
Morita persisted with his efforts to inform US citizens, from the President down to the person on the street, of the system's unfairness. Nevertheless, the tentacles of the unitary tax system continued to spread. In the 1980s, the Reagan Administration emphasized a policy of minimizing federal involvement in state affairs and effectively pressuring the states to raise revenue independently. As a result, Oregon, Alaska and Illinois adopted the unitary tax system. This generated protest from as far away as Nigeria, but by 1983, fourteen states had adopted the system.
Morita had taken it upon himself to lead the campaign to eliminate what he saw as an unjust tax. His primary objective was not to lessen the tax burden on Sony's operations; it was to remove a barrier threatening the livelihood of all foreign companies in the United States and the health of Japan-US economic relations. In Morita's words, "This tax is bad business for both our countries."
The campaign to abolish the unitary tax system gradually began to yield results. It came to be supported by a wide range of people and groups with different backgrounds. The public relations campaigns aimed directly at the state taxation offices had been particularly effective. Persuaded by arguments from Japanese company executives, state after state indicated their willingness to amend the system. As a growing number of foreign companies curtailed investment, sold factories, and moved out of the states, state politicians came under extreme pressure to reexamine taxation laws. In August 1984, Oregon became the first state to rescind its unitary tax system, followed closely by Florida later in the year. Indiana, Utah and Colorado followed suit in 1985.
Japanese companies employed over 50,000 people in California at the time. The groundswell of support for the abolition of the tax at the grass roots level spread to the state legislature, where an increasing number of representatives were in favor of amending the taxation system.
The final nail in the coffin came in August 1986 when California's stubborn state legislature finally approved a bill to revise its taxation laws. This came a few months after the Tokyo Summit, the theme of which was collaboration on policies for economic growth and development. The revised tax law came into effect in January 1988.
Foreign companies (with over 80% of their total consolidated sales generated abroad) could then elect to have their income tax assessed under the current unitary tax system or under a new "water's edge" system, which considered only the total sales of a company's operations in the United States. Thus, the overseas income of a company group was no longer relevant. Although foreign companies would be required to pay an "election fee" if they chose the new system, a large financial burden had been lifted.
After the Governor of California signed the revision to the state's taxation laws in September 1986, Sony declared that it would invest an additional $30 million in its San Diego factory over a three-year period.
The triumph of the grass-roots campaign against the unitary tax system was a triumph of persistence. After California, all other states with unitary tax systems revised their taxation laws and the system disappeared completely with Alaska's amendment in 1991.
After its establishment in 1960, SONAM worked hard to blend into the business culture of the US. Morita remembered those years as a time when his patience was pushed to the limit on numerous occasions. The perplexities of the US legal system often left him scratching his head. Yet he persevered and soon developed a sufficient understanding. He once remarked that, "If you don't know your way around the law, it is impossible to do business in the United States."
The most important factor in Sony's success was commitment from the top as displayed in the leadership Sony showed during the campaign to have the unitary tax abolished.
Morita was personally interested in legal issues and was instrumental in assembling a legal team at the Sony head office in Tokyo. With the help of lawyers such as Edward Rosiny, he was able to train Tamotsu Iba, Kenichiro Yonezawa, Teruo Masaki, Teruhisa Tokunaka and other Sony managers in the intricacies of doing business in the United States.
Whenever a legal problem arose, Morita and Rosiny would direct the legal team as to the appropriate action to take. Sony concluded a large number of contracts with US companies in the 1960s and 1970s, including contracts with Super Scope Inc., joint venture agreements with TI and Tektronix, and technology transfer agreements with IBM and other companies.
Sony eventually became embroiled in two major antitrust lawsuits. The first, brought by US TV manufacturers National Union Electric Corp. and Zenith Radio Corp. against a group of Japanese TV makers, became a landmark case in the 1970s. Then in 1987, Go-Video Inc., a consumer electronics manufacturer, brought a lawsuit against Japanese and South Korean VCR makers and US motion picture companies, alleging breach of antitrust laws. In both instances, the plaintiffs claimed enormous damages.
The Sony legal team honed its skills amid an environment of contracts and lawsuits. The first time they were truly tested was on the Betamax case beginning in September 1976. Sony received proposals from its US advertising agency for a new Betamax advertising campaign. The ads referred to Columbo and Kojak, two of the most popular programs on television at that time, and mentioned that viewers no longer had to choose between the two. The ad promised that with Sony's new Betamax system, viewers could watch one of the programs now and one at a later time. These advertisements led to a complaint from Universal Pictures Inc. and its parent company, MCA Inc. Both Columbo and Kojak were distributed by Universal Pictures. The release of the advertisements eventually resulted in an eight-year lawsuit before the Los Angeles District Court. It was the first time that Sony faced allegations of copyright infringement.
The plaintiffs in the suit, Walt Disney Productions and Universal Studios, made a four-part claim against Sony. First, programs made by the respective plaintiffs were the property of the said plaintiffs. Second, the rights attached to this property included the rights to any reproductions of the original programs. Third, it was inevitable that VCRs would be used by consumers to reproduce programs without the permission of the plaintiffs, thereby indirectly infringing on the property rights attached to the original program. Fourth, Sony was contributing to the infringement of copyrights through the activities of manufacturing and selling VCRs. In addition to Sony, advertising agencies, retailers and all those who had made copies of the programs were included in this litigation.
If the plaintiffs' contentions were upheld, Sony would have to stop selling VCRs in the United States. Unless the law was revised, the future of the VCR would be in doubt. There was also the question of damages.
Led by Morita, Sony was ready to sacrifice the time to defend its position. Sony's future and the future of a vital part of the world electronics industry were at stake. "Time-shift," a phrase Morita had coined to describe the concept behind the home-use VCR, was to become the central theme of Sony's defense, which was based on two arguments. First, the basic concept behind the home-use VCR is to free the public from the constraints of television scheduling, in other words, to allow people to watch programs at their own convenience. Second, the huge volume of information transmitted over the airwaves by television stations is in the public domain. The VCR is merely a device that extends the function of the television -- that is, it enhances people's ability to watch information which is publicly broadcast. The only difference is that the VCR enables people to do so when it suits them.
Sony won the first round of litigation when the L.A. District Court accepted Sony's arguments and handed down its decision in October 1979. However, Universal Studios appealed this decision to the US Court of Appeals in 1981, and the original decision was overturned. Sony was naturally dissatisfied with this decision and in turn appealed to the Supreme Court in Washington the following year.
Until the original decision was overturned by the Appellate Court in 1981, the media and general public had not shown a great deal of interest in the case. Neither had Sony employees, with the obvious exception of the people in Sony's legal team. But the decision by the Appellate Court quickly changed this state of affairs. Newspapers throughout the US became absorbed in the case. There was almost unanimous agreement in the press that the decision against Sony was wrong, even unpardonable. The reactions went as far as the popular Mickey Mouse comic strip, which depicted Mickey Mouse putting handcuffs on a consumer trying to use a VCR at home. By then, however, the Sony battle had spread to include other VCR manufacturers as well.
"This is not only a matter for the courts. This question should be brought before Congress," Morita asserted. He pointed out that the provisions in the US copyright laws were written at a time when such new technologies as VCRs had not even been envisaged. There were no US provisions equivalent to those in the Japanese law, which stated that the reproduction of materials by individuals for their own enjoyment did not constitute a breach of copyright. Soon after Morita voiced his opinion, a movement to amend the copyright laws to account for reproductions made by individuals using VCRs began among US politicians.
Morita was convinced that the legality of recordings made with home-use VCRs should not rest on a court decision, but rather should be established through legislation. While recognizing the need to involve the courts where there is uncertainty with regard to existing legislation, Sony's underlying argument was that the law should be clarified. While Morita gave guidance, Yonezawa, Masaki, and Tokunaka worked with Wada and US attorney Dean Dunlavey in preparing for the Betamax case. At the same time, Morita and his team lobbied politicians to push for amendments to copyright laws. It was a rare occasion in which moves to have legislation amended were proceeding at the same time as an appeal was being filed with the Supreme Court.
There was the additional burden of dealing with the motion picture studios, which traditionally had very strong political ties. If the law was amended to allow reproduction for private use, the potential volume of lost royalties was enormous. There was no way motion picture studios were going to sit back and let this happen without a fight. Sony thought the best way to combat the political influence of the studios was to appeal to the people who put politicians in power -- the voters.
A coalition was formed among manufacturers, dealers, and consumers to assert Sony's time-shift concept. The coalition enlisted the services of lobbyists and lawyers to lobby members of Congress, collected petitions from citizens, and asked dealers and consumer groups to write their local congressmen requesting an amendment to the copyright laws. As in the case of the unitary tax system, Sony had initiated a grass-roots campaign that was gradually spreading across the United States.
The motion picture industry had also begun its own campaign, enlisting the support of movie stars and powerful lobbyists. While the question of copyright laws lay in the hands of Congress, the scale of the issue ballooned. Retailers, consumers, the motion picture industry, and finally the music industry, all chimed in to voice their opinion on the issue.
Sony was inundated with calls from the media. Morita was vocal in the campaign to have the copyright laws amended, regularly making public speeches and using the media to put forward his message. Front-page newspaper advertisements displaying the headline, "What time is it now?" were used to point out the sense of the time-shift argument. Morita traveled the length and breadth of the United States determined not to give in until everyone had heard his message.
Sony's legal team worked feverishly to file an appeal with the Supreme Court. In the US, filing an appeal with such a high court does not automatically grant you acceptance. The Supreme Court first hears the grounds for appeal and, if it finds that the appellant has sufficient reason to appeal the case, it then hears the case in full.
The exceptional amount of preliminary work done on the case paid off when Sony filed the appeal in March 1992. But the actual appeal proved to be long and draining for both parties. Unbelievably, however, the Court's first ruling did not bring an end to the matter. The Court wanted both sides to reargue their cases. After going through the rigorous ordeal once again on January 17, 1984, Sony won the appeal in a perilously close five to four decision. The majority opinion reasoned that reproduction by a VCR of information broadcast for free by television stations was not an infringement of copyright. Therefore, VCR manufacturers could not be said to have breached the property rights of program makers. The phrase "time-shift" was actually used in the written opinion.
The decision confirmed Morita's conviction that the VCR was first and foremost a device that benefited consumers by removing time constraints. It was a sweet revenge for the countless hours that Sony's legal team had spent on the project. Sony had proved its time-shift argument was consistent with existing copyright laws and, in the process, had become the first Japanese corporation to win an appeal in the US Supreme Court.
If the case had been held at another time the outcome might have been different. In the 1970s, home use VCRs were being used by consumers to record TV programs so that they could watch them at their own convenience. There is no doubt that the home video recorder, or Betamax case, was a test case that at the same time ushered in a new generation in home entertainment.
The influence of this case is still felt today. Governments review copyright laws with each new technical development in recording media. Sony carefully analyzes the potential for legal problems before releasing new products. This procedure is particularly important given the ongoing advances from analog to digital video recording technology. Before the first digital audio tapes were released, hardware and software makers worked together in drafting a proposal regarding copyright issues.