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 www.securityexecutivecouncil.com/?sourceCode=std.