Too Much Trust?

Dec. 21, 2004
Are trade secrets safe with suppliers?

Steven L. Davis, 48, sits in a federal prison camp in Montgomery, Ala. One of 10 to be convicted under the federal Economic Espionage Act of 1996, Davis, who worked for a firm that supplied Gillette Co., is serving two years and three months for stealing highly confidential product information belonging to the razor manufacturer and distributing it to its competitors, causing Gillette $1.5 million in damages. Currently, the FBI is investigating approximately 800 other trade theft cases under the same espionage statute. In July 1996 Davis signed a Confidentiality & Technology Assignment Agreement while employed at Wright Industries Inc., a Gillette supplier in Nashville. Davis acknowledged that as Wrights lead design engineer on a Gillette project to help develop equipment to manufacture its Mach3 razor, he would learn trade secrets. Early the next year, Davis violated that agreement by sending engineering drawings of Gillettes razor assembly machine to Bic Corp., American Safety Razor Co., and Warner-Lambert Co. During his trial in federal court, Davis claimed he distributed the confidential information because he was angry at his supervisor and feared losing his job. Theft of intellectual property by trusted insiders, primarily employees or contractors, happens all too often. Whats more, it can result in decreased revenue, lost market share, or even bankruptcy. A 1997 study by the American Society for Industrial Security (ASIS) estimates that intellectual property loss by U.S. companies amounts to $250 billion annually. Those cultivating a trusted relationship with a company pose the most serious threat, finds the study. Economic espionage occurred as early as the sixth century when Byzantine emperor Justinian I (483-565) directed two monks to steal silk worms, by stuffing them in hollow walking sticks, from the Chinese so he could learn how to make silk. What has changed since then is the speed, efficiency, and profusion of intellectual-property pirates. Just about any manufacturer is vulnerable. "Today all businesses are in the information industry. They spend more time processing data about how their widgets are designed than they do designing widgets," points out Dan T. Swartwood, manager of information security for Compaq Computer Corp. and coauthor of the ASIS study. Some corrupt insiders are placed in corporations by foreign governments eager to lift key technology from U.S. businesses. In other cases, a disgruntled employee steals data to retaliate for perceived wrongs. Preventing people in positions of power from pilfering sensitive information can prove extremely difficult. One way manufacturers can reduce the likelihood of being victimized is to better understand their suppliers operations. For example, to learn details on a vendors operations, some manufacturers are auditing their suppliers engineering processes and financial records and learning how much business the vendor does with the competition. To save money, certain manufacturers are whittling down the number of suppliers they buy from, which helps them better manage vendors and eliminate those posing threats. A number of companies sacrifice information to simple carelessness. Courts have ruled that for trade secrets to be considered proprietary they must be securely stored and protected. In other words, company information taken from a corporate area used by the public, such as a lobby or a cafeteria, cannot be considered proprietary. Manufacturers also lose intellectual property because few recognize its importance to the future of their business. Product-development designs, price, and customer lists obviously should be guarded, but what about a chart detailing managements reporting structure? "Manufacturing is behind the curve when it comes to protecting information," admits Regis W. Becker, director of corporate security and compliance at PPG Industries Inc., which made significant changes to its information-protection procedures after a suppliers employee was caught trying to sell sensitive information to competitor Owens Corning. "The biggest opportunity is changing peoples mind-sets, but its hard to convince someone that a small piece of a project is important property," Becker says. In 1995 the FBI expanded a program once designed to expose foreign agents spying on defense contractors to include general business. One goal of the bureaus revamped Awareness of National Security Interests & Response (ANSIR) is to help companies understand economic-espionage risks and encourage them to protect intellectual property. "One question we hear is, Who would want our information?" reports Larry Watson, national manager for the ANSIR program. "If a company is competitive, it has secrets worth protecting." ANSIR updates manufacturers about techniques used by industrial spies by broadcasting details by e-mail to any U.S. business that signs up for the service. (Contact: [email protected].) "The classic example is the executive in a boardroom releasing a five-year plan wearing a wireless microphone so everyone can hear. What he doesnt realize is that he is broadcasting a mile and a half down the road to anyone with a $75 police scanner," points out Watson. All that a well-placed supplier intent on lifting secrets has to know is when that boardroom meeting is going to take place. Often its an intellectual-property catastrophe, such as the theft of a proprietary production technology, that forces a company to figure out how to hold onto key information. Some go overboard. "They hire consultants, pay huge amounts for all kinds of protection to prevent another information Chernobyl," explains Swartwood. But as management scrambles internally to prevent another loss, it often tries to keep news of the theft from shareholders, government officials, and other businesses. Many losses dont even go beyond department walls. Managers are embarrassed to tell their supervisors that information has been stolen, and the silence continues up the chain of command. Executives fail to reveal intellectual property theft to their boards, much less Wall Street or the press. "Information loss is like the AIDS of corporate America. For a long time no one would talk about it, fearing the impact on their stock prices and confidence of customers," points out Swartwood. The code of silence means that only a small percentage of the supplier-customer disputes over information theft end up being investigated, much less taken to court. Working overseas with foreign contractors can present more risks than partnering with a U.S. vendor. Few countries have intellectual-property laws as strict as those in the U.S. Some have statutes but enforce them erratically. Other countries simply obey a code of business ethics different from that in the U.S. In developing countries, a number of manufacturers refuse to transfer their latest technology. In China, PPG uses several contractors on one project so none can view the companys proprietary technology in its entirety. "Companies outsourcing production overseas have to weigh the risks and opportunities: losing trade secrets versus access to new markets," advises Frank Ruotolo, president of the Futures Group, Glastonbury, Conn. Fourteen years after Salvatore (Sal) Monte contracted with a major Japanese manufacturer he had to declare bankruptcy because, as he explains it, the Tokyo-based chemical and food giant stole his companys key technology. Montes David-and-Goliath battle with $24-billion Ajinomoto Co. Inc. started just a few years after Monte arranged for Ajinomoto in 1980 to produce and distribute his companys titanates -- compounds used to improve the quality of video and audio tapes, tires, and other products -- in Asia. "Ajinomoto is like a Du Pont or GE with ties all the way back to Japans royal family, I never expected to have problems with them," says Monte, president of Kenrich Petrochemicals Inc., Bayonne, N.J. Indeed, Ajinomoto executives invited Monte to Tokyo, wined, dined, and made him feel like a local celebrity. At the same time, Monte charges, Ajinomoto began engaging in a practice illegal in the U.S. and the European Union, but not in Japan. It started "patent flooding," changing Kenrichs titanates slightly and then filing a patent for the modified formula. Ultimately Ajinomoto registered 31 titanate-related patents in Japan. Meanwhile Monte heard reports that Ajinomoto was selling titanates under its own trade names in Japan, Taiwan, South Korea, Australia, and even the U.S. Monte estimates the Japanese manufacturer owes him $50 million in royalties on Ajinomoto sales of titanate he puts at $1 billion. Testifying before the House Judiciary Committee in June, Ajinomoto lawyers argued that the company did not steal Kenrich technology. They say Kenrichs products did not meet Asias quality standards and local competition sold a better compound. Ajinomoto attorneys said its sales revenues on titanate were less than $1 million annually. For Monte, battling a Japanese manufacturing giant took time, money, and energy. "I lost all the momentum of my business," he says. Forced to declare bankruptcy in 1992, Monte since has emerged from financial crisis and hopes to recover the $50 million he believes Ajinomoto owes him through U.S. federal court. "Ill fight to the death," he vows. "This is a family business. What else am I going to do?"

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