Small Business Secrets Under Siege

Around the world, business competitors, enterprising thieves and national governments are stealing and using trade secrets from developed nations to produce products worth hundreds of billions of dollars per year.

One of the prime targets are U.S. small businesses. While Fortune 1,000 companies fall victim to economic spies, huge multi-national companies generally have the security resources and process to reduce the incidents of theft and to run investigations that can bring the thieves down if theft does occur. Small businesses, however, do not have those capabilities. When thieves steal technological know-how from a small business and send products to market, chances are the small business will die.

Most businesses are small: A recent study by the U.S. Small Business Administration’s Office of Advocacy counted 26.8 million businesses in the United States. Of those, 99.9 percent have fewer than 500 employees and are considered small businesses. Call them the Fortune 26 million.

“The important point about small businesses is that they create the vast majority of technological innovation,” says Lynn Mattice, chairman of the board of advisors of the Security Executive Council.

According to Census Bureau data on high-patent industries, 98 percent of the companies patenting telecommunications technology employ fewer than 500 people. In the software publishing industry, 97 percent of the companies patenting software employ fewer than 500 people. In aerospace products and parts manufacturing, the percentage is 92 percent. In pharmaceuticals and medical manufacturing, it is 90 percent. In semiconductor machinery manufacturing, 87 percent of the companies that patent technology employ fewer than 500 people.

“These companies are tremendously important engines of innovation,” Mattice says.

Intellectual property experts say these companies are being methodically stripped of their trade secrets by international networks of economic thieves.

Professor James Chandler, president of the National Intellectual Property Law Institute, the original author of the federal Economic Espionage Act and a contributor to the update of the Uniform Trade Secrets Act, is considered one of the world’s leading experts on intellectual property. He characterizes the damage done to the United States by intellectual property and trade secret theft, copyright infringement and counterfeiting as daunting: “This country may not be able to recover from the loss of the technological advantage that it has always enjoyed,” he says. “Global leadership in technology has always been the hallmark of American leadership. When a country loses its technological advantage, it will no longer be able to compete in the global marketplace and will cease to be a dominant world power.”

In support of Chandler’s view, an investigative report by Business Week (February 7, 2005) estimates of the value of legitimate sales lost to intellectual property theft and related activities as high as $512 billion per year.

One thing for certain, however, is that there is no accurate way to determine the exact impact of counterfeiting and piracy on the global economy. In 2007, the United Nations-sponsored Organization for Economic Co-operation and Development (OECD) released a report entitled “The Economic Impact of Counterfeiting and Piracy,” which estimates that trade in counterfeit and pirated goods across national borders may have totaled nearly $200 billion in 2005. The report further states that the total value of trade in counterfeit and pirated goods — including products illegally produced and sold inside the same country — may have been several hundred billion dollars higher. Its estimate excludes the value of digital products distributed via the Internet. The OECD report, however, also acknowledges that its $200 billion estimate is based solely on data from reported customs seizures of counterfeit goods in OECD countries.

One of the things that counterfeiters clearly depend on is the inability of customs officials around the world to handle the sheer volume of commerce associated with trade in today’s global economy. Other reports peg the cost of counterfeit and pirated goods at between 5-7 percent of the collective global economy. If accurate, that would equate to a potential economic impact of counterfeiting and piracy at nearly $1 trillion dollars annually.

Combating counterfeiting and piracy has also become of such importance to the G8 that they issued a joint statement on the issue in 2006, which included the following comments: “Combating trade in pirated and counterfeit products is a complex problem which assumes, in the context of globalization, a trans-border character, and can only be solved through individual and joint efforts by all nations and relevant international organizations. In that regard, we note the usefulness of international congresses and workshops devoted to effective protection and enforcement of intellectual property rights.

“Taking into account the significant volume of global trade in pirated and counterfeit products which is often linked to organized crime, as well as economic, political and moral damage caused by intellectual property rights violations and crimes, we will continue to give priority to enhancing cooperation with a view to substantially reducing the global trade in pirated and counterfeit products, and to taking effective measures against transnational networks supporting such trade,” the report concludes.

In some cases, intellectual property theft is a matter of national security. “We’ve seen this kind of thing happen in major weapons projects, which might involve thousands of subcontractors,” says Mark Levett, an FBI Agent assigned to the Bureau’s Domain Program, which protects trade secrets connected to military and defense industry technology. “A foreign intelligence service might set up a front company to bid on a piece of the project. To complete the bid, they need the blueprints, which of course contain sensitive information.”

China may be the world champion counterfeiter. U.S. Customs estimates that 73 percent of the counterfeit goods it seizes each year come from China.

What’s Behind the Flood of Counterfeit Products?
“The world doesn’t follow our rules,” says Delos Smith, former senior economist with The Conference Board. “As U.S.-based, multi-national companies rub up against customs and cultures of other countries, they create anger and frustration that spawns all kinds of security risks. These companies and their western ways cause changes in societies built on traditions that are valued deeply. The changes breed resentment and lay the foundation for problems such as terrorism and economic espionage.”

Additionally, developing countries have historically used economic espionage to catch up with more advanced economies. In 1810, for example, Francis Cabot Lowell traveled from Massachusetts to England and Scotland.

Along the way, he memorized the design of the Cartwright loom, the most advanced textile manufacturing technology of the day. Within years, the United States was manufacturing its own clothes and depriving England of an important market.
Today, business people in developing nations are modernizing by stealing technologies from the United States and other advanced countries.

Just because it has always been done, does not mean that it isn’t painful. Just ask Brett Kingstone.
The Real War Against America

Brett Kingstone is an inventor and a manufacturer who is representative of what happens to small businesses taken by surprise by intellectual property thieves.

In his book, The Real War Against America (Specialty Publishing Company Inc., 2005), Kingstone writes about how he developed a way to make signs resembling neon, but brighter, thanks to proprietary manufacturing equipment. Not only is his lighting system brighter than neon, it uses a fraction of the energy by using a 12-volt transformer to power the system vs. a 15,000-volt transformer used in neon.

His start-up company, Super Vision, went public, attracted investors and customers and grew into a multi-million-dollar operation. The company reached a plateau in 2000, when competitors based in Shanghai and Hong Kong, led by a man named Samson Wu, stole Super Vision’s trade secrets and undercut Super Vision’s prices. The gang had recruited and paid an executive inside Super Vision $1.4 million dollars to steal the manufacturing technology that Super Vision had spent tens of millions of dollars and years of research effort developing through trial and error.

Determined not to lose his business, Kingstone filed suit in civil court and reported the case to the FBI.
In the civil trial, the jury awarded Super Vision the largest trade secret victory in Florida history. But Wu and his companies were out of reach, and Kingstone could not collect.

“Civil verdicts are worthless against trade secret theft by people in other countries that don’t abide by our laws,” Kingstone says. “Unless the U.S. government makes arrests, prosecutes and sends people to jail, this kind of economic terrorism will continue.”

9/11 Deflects Government Resources Away From Intellectual Property Cases
While Kingstone was pursuing the civil case, the FBI was also investigating the criminal case against Wu. Then came the Sept. 11 terrorist attacks, and everything changed.

The special agents assigned to the Super Vision case were re-assigned to investigate domestic terrorism. “I understood why this was a top priority,” Kingstone says. “A couple years later, FBI agents were re-assigned to the case and continued the investigation. But the U.S. Attorney refused to prosecute.”

The terrorist attacks led to a major re-alignment of federal resources. At the Justice Department, terrorism became the single most important priority. According to TRAC Reports Inc., a Syracuse University-based research group that tracks data about staffing, spending and enforcement activities of the federal government, the Justice Department prosecuted a dozen or so cases of terrorism in the year 2000. In 2001, the year of the attacks on the Twin Towers and the Pentagon, just over 50 cases were prosecuted. The following year, 2002, U.S. Attorneys took up more than 350 cases.

TRAC data also indicates that the rise in terrorism prosecutions crowded out other cases. Between 2002 and 2007, prosecutions of white-collar crime fell 27 percent from 9,500 per year to about 7,000. Over the same period, official corruption cases decreased by 14 percent; organized crime prosecution plummeted by 48 percent; drug cases went down by 20 percent; and drug and weapons cases went down by 30 percent.

Prosecutions rose sharply — by 127 percent — in the category of immigration, perhaps because of the federal government’s interest in preventing terrorists from entering the country.

Today, the number of terrorism cases has fallen back to pre-9/11 levels: from 350 in 2002 to 60 or so in 2003 and to fewer than 50 today.

Interestingly, while many categories of prosecutions have failed to rebound, intellectual property prosecutions — after declining in the 9/11 years — have begun to rise. In its 2008 Performance and Accountability Reports, the Department of Justice reports that intellectual property theft prosecutions have rebounded. In 2001 and 2002, prosecutors filed around 80 intellectual property cases, a decline of about 20 percent from pre-9/11 years. Since then, however, the numbers of cases filed have risen slightly — to 200 in 2007 and 179 in 2008.

“It’s just not enough,” Mattice says. “It’s only the tip of the iceberg.” Mattice adds that only a handful of convictions have resulted in prison sentences since the enactment of the Economic Espionage Act (EEA) of 1996. While most criminal intellectual property laws focus on copyright infringement or counterfeiting products, the EEA criminalizes the act of stealing trade secrets. By prosecuting the acts of theft, the hope is that the counterfeit products will never appear.

Professor Chandler agrees that the number of prosecutions, while rising some, remains far too low. “I am extremely disappointed at the abysmal record of the Justice Department and the network of U.S. Attorney Offices around the country,” he says, “for failing to aggressively prosecute those who are stealing America’s technologies at an unprecedented pace.

“The entire structure of the U.S. Government must quickly come to understand that they have a sovereign duty, as articulated in the Constitution, to focus on safeguarding the economic security of this country, which must become and remain the number one national security priority of all branches of government,” Chandler concludes.

Bob Hayes is president and founder of The Security Executive Council, a member organization for senior security and risk executives from corporations and government agencies responsible for corporate and/or IT security programs. In partnership with its research arm, the Security Leadership Research Institute, the Council is dedicated to developing tools that help lower the cost of members’ programs, making program development more efficient and establishing security as a recognized value center. For more information, visit