Preventing Trade in Secrets
Strategies for IP Protection in Global Markets

Trade secret theft in Asia and around the world costs industry billions of dollars every year, deeply affecting economic growth and security. A U.S. International Trade Commission report estimates that firms in U.S. IP-intensive businesses operating in China alone reported over $42 billion in losses of sales, royalties and fees in 2009, the most recent data available, due to intellectual property (IP) theft or infringement.

CREATe.org (Center for Responsible Enterprise and Trade), a nonprofit organization working to protect IP rights and fight corruption, recently released the white paper “Trade Secret Theft: Managing the Growing Threat in Supply Chains,” which details trade secret theft and the need for IP protection at the corporate level.

NBR spoke with CREATe.org President and CEO Pamela Passman, a member of the NBR Board of Directors, to better understand the growing problem of trade secret and IP theft and to identify solutions for companies and governments.

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Could you please describe what a trade secret is and what trade secret theft means?

Trade secret theft is part of the broader issue of the need to better protect and manage intellectual property rights (IPR). While multinational corporations (MNCs) each have different priorities and concerns related to IPR protection, the challenges are pervasive across most sectors of the economy. Some companies are more focused on copyright, patent, and trademark protection. Other companies face tremendous challenges around counterfeiting of registered designs and brand names. An aspect of IPR that all companies seem to face is trade secret misappropriation—that is, the theft of proprietary technologies, manufacturing processes, and other confidential information.

CREATe.org is focused on anti-corruption and protection of IP, two issues of keen concern to MNCs operating globally and challenges we believe can be addressed in a collaborative way.

What was the purpose of CREATe.org’s recent report on trade secret theft? What were the findings?

The extent of the pervasiveness of trade secret theft was made clear to us when we held discussions and roundtables with more than 100 MNCs in the United States, Europe, and Japan. What was striking in those discussions was that trade secret theft is an increasingly critical issue for MNCs. As such, we felt it would be a good issue to explore further.

We wanted to spark a more public dialogue about how far-reaching and deeply challenging the trade secrets theft issue is for MNCs, while also offering practical guidance for securing supply chains and mitigating the significant risks and costs associated with this challenge.

The report’s findings proved incredibly interesting. First, it showed that everyone is vulnerable and the risks are significant. ASIS International estimates that “as much as 75% of most organization’s value and sources of revenue are in intangible assets, intellectual property, and proprietary competitive advantages.” According to a report issued by the Office of the National Counterintelligence Executive (ONCIX), billions of dollars are lost each year due to economic espionage. CREATe.org’s report goes on to outline case studies and steps that MNCs can take to reduce the threat of trade secret theft in their supply chains.

What are the effects of industrial theft for corporations, governments, and IP owners?

Trade secret theft has no boundaries—losses are experienced across the spectrum, from local companies and IP owners up through to MNCs. In our report, we showcase examples ranging from a chemical maker providing tackifier resins for tire manufacturing to examples of issues faced by global brands such as Coca Cola, DuPont, and Ford Motor Company. In the case of the chemical maker, a former plant manager entrusted with the formula went to work for a competitor who later produced a virtually identical product. In the Ford Motor Company case, an engineer copied four thousand Ford documents onto an external hard drive and went to work for a competitor. Ford estimated that it suffered more than $50 million in losses. Similarly, an employee at Valspar Corporation downloaded proprietary paint formulas with the intent of taking them to a new job. The formulas were valued at $20 million—about one-eighth of the companies reported profits that year.

These losses extend to jobs, innovation capability, and economic growth in countries as well. MNCs are increasingly concerned about trade secret theft for several reasons. First, the rise of digital technology and storing of valuable corporate information in data centers creates vulnerabilities. Second, today’s interconnected global economy and the need to outsource operations means that MNCs are forced to share highly sensitive and valuable trade secrets with foreign subsidiaries, joint-venture partners, and third-party vendors. In many parts of the world, the rule of law around trade secret theft is weak, and as such, this makes it even more challenging for MNCs. In response, MNCs shared that they are being more judicious about supply chain management, and in high-risk countries are limiting outsourcing and the sharing of proprietary information with third parties where sensitive information could be at risk.

In a recent roundtable event that CREATe.org co-sponsored with the U.S. Department of State, Keith Maskus, Associate Dean at the University of Colorado, Boulder, shared evidence that when countries make increases in IP protection, they increase inward technology flows. He also discussed how companies will not invest in local manufacturing resources or joint partnerships if there is a threat of IP piracy.

How does CREATe.org’s report propose that companies working overseas combat the loss of trade secrets?

In the report, we highlight five key steps for improving the protection of trade secrets within supply chains:

• First, conduct a strategic assessment of the company’s trade secrets. An MNC should evaluate its trade secret policy and supplier code of conduct, assess potential vulnerabilities where trade secrets could be transferred, and consider operational structures.

• Second, undertake appropriate pre-contractual due diligence. This should include an assessment of any potential supplier, evaluation of other IP-related issues, analysis of the supplier’s employment and nondisclosure agreements, and investigation of the supplier’s subcontractors.

• Third, employ strong contractual protections to safeguard the company’s trade secrets both during the relationship and afterward. Contractual provisions specifically relating to the supplier’s employees and subcontractors should also be reviewed.

• Fourth, utilize appropriate operational and security measures. These should include steps to ensure that the correct personnel, physical security measures, and technical safeguards are in place to protect the company’s trade secrets. Systematic engagement with the supplier can help bolster the effectiveness of these measures.

• Finally, take appropriate action after the business relationship has ended. Companies should remind departing employees and former business partners of their continuing obligation not to disclose trade secrets.

To help MNCs manage these issues, CREATe.org is developing resources, tools, and recommended processes that will work within existing supply-chain compliance frameworks. We have learned that it’s not enough to just assess the situation. To be truly effective, MNCs must continually work to implement and train supply chain and business network partners on the ways they can protect IP.

What can the United States and foreign governments do to stop the theft of trade secrets?

Governments need to be held accountable for the commitments they make and enforce their laws. Enforcement depends on political will, and at CREATe.org, we were therefore gratified to see the language that came out of the recent G-8 Summit. In their Camp David Declaration, G-8 leaders underscored the importance of IPR to stimulating job and economic growth. The governments affirmed “the significance of high standards for IPR protection and enforcement, including through international legal instruments and mutual assistance agreements, as well as through government procurement processes, private-sector voluntary codes of best practices, and enhanced customs cooperation, while promoting the free flow of information.”

We hope to see these governments moving from commitment to action, adopting and publicizing concrete plans to implement their commitments in the near future, as well as a broadening of these commitments to the governments of the G-20 and beyond.

The United States has included strong IP protection in its recent free trade agreements (FTA), such as the Korea-U.S. FTA, and IPR is a high priority in negotiations for the Trans-Pacific Partnership agreement (TPP). How effective can these agreements be in enforcing IP theft laws?

The Korea-U.S. FTA is an important model for strong IPR protection, and it is critical that the TPP agreement continue to build on this strong standard for IPR protection. FTAs can serve as an important driver of change in local economies, making it less likely that often hard-fought policy changes will be reversed in the future, and leading to additional domestic reform as countries work to implement their specific provisions.

As the Asia-Pacific region continues to grow and FTAs expand in the region, having this high level of IPR protection in the TPP will be key to ensuring the growth of IP-intensive industries.

What else do you think is important for readers to understand about this issue?

It’s critical that companies understand the importance of IP protection and corruption prevention for creating a level playing field that will fuel economic growth and innovation. We have put the two issues of IP protection and corruption prevention together in large part because the manner in which companies can and should address both corruption and IP protection in their own organizations and with their suppliers is very similar. And, because the anti-corruption field is much more mature—and companies already have policies and procedures in place to use in their own organizations and with suppliers—there is a lot we can learn from the anti-corruption field.

A recent U.S. Department of Commerce report highlighted the importance of IP to the U.S. economy, stating that IP-intensive industries directly accounted for 27.1 million American jobs, or 34.8% of the U.S. gross domestic product (GDP).

It’s also imperative that multinational companies understand that one of the most promising solutions to these challenges already exists via global supply chains. MNCs and their global supply chains comprise 60% of global trade in goods and represent tremendous opportunity for strengthening compliance.

CREATe.org is developing credible, practical, and easy-to-implement tools for MNCs to help improve compliance and transparency with global suppliers and business partners. We are currently in the process of recruiting companies to review our recommendations and ultimately pilot our solutions. If any of your readers are interested in talking with us, we’d welcome it!

Thank you for the opportunity to share our insights on trade secret theft and CREATe.org. To download the report, please visit www.create.org.

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Pamela Passman is President and CEO of CREATe.org and a member of the NBR Board of Directors.

This interview was conducted by Sonia Luthra, Assistant Director for Outreach, and Allen Wagner, an intern at NBR.