Small Business Secrets Under Siege

Brett Kingstone and the Security Executive Council explain how economic espionage costs the U.S. economy billions of dollars annually while destroying small businesses and technological innovation

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.

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