There was a time when the theft of a trade secret elicited a seemingly counterproductive response from the corporate victim — keeping the theft a secret. On one level, such a reaction was understandable, given the risk that going public about the compromise of a key piece of intellectual property (IP) could cause further harm to the bottom line.
But silence is no longer an option, given the surge in cyber-espionage and the growing role IP plays in today’s knowledge-based economy. A rise in awareness about the threat — and potential damage — of trade secret theft has also helped spark a change in strategy. A recent study by PwC and the Center for Responsible Enterprise and Trade (CREATe) estimated that losses from trade secret threats range from 1% to 3% of advanced economies’ gross domestic product — hundreds of billions of dollars in the U.S. alone.
Putting a dollar figure on corporate espionage has always been a challenge, in part due to the silence of victims and the difficulty of even detecting IP theft. To get around those limitations, the study used research and development (R&D) spending and illicit activities —from corruption to occupational fraud — to come up with a ballpark range.
“It is difficult to accurately measure economic losses attributable to trade secret theft at a national or industry level,” says Pamela Passman, president and CEO of CREATe, adding that the proxy approach provides a “reasonable” estimate given the similarities between trade secret theft and other illicit activities.
The proliferation of cybercriminals, state agents and other players getting in the game has elevated the issue to the top of the international trade agenda. During high-level meetings in July, the U.S. got further commitments from China to clamp down on theft.
The U.S. and European Union have also taken steps to update their laws to keep up with ever-changing nature of the problem. Yet the inability to protect trade secrets in a consistent manner across jurisdictions creates an uncertain legal environment for companies operating internationally.
“For many companies, the actions take place in regions where the rule of law is weak for prosecution and, as such, many companies aren’t able to recover any damages,” says Passman.
The International Chamber of Commerce highlighted the weakness of legal protections worldwide in a recent report, “Trade Secrets, Tools for Innovation and Collaboration,” noting that the policy response remains extremely fragmented. The report notes that the convergence of trade secret laws globally could provide more legal certainty, but emphasizes that “ensuring that confidential business information is adequately protected from misappropriation requires action at the firm level, first and foremost.”
Thus, companies must play a key role in neutralizing the threat, and most recognize that. The vast majority of executives who participated in the latest GE Global Innovation Barometer — 86 percent — say protecting trade secrets is a priority.
Passman has been on the front lines of the corporate response, leading an effort to share best practices on minimizing the risk of theft across the global supply chain. Ideas Lab spoke with the former deputy general counsel for Microsoft about how executives can be proactive about protecting IP in the face of the changing scope and nature of the threat:
Working with PwC, you’ve come up with one of the best methods for calculating trade secret losses, using various proxies — corruption, illicit financing, occupational fraud — to come up with an estimate of 1-3% of GDP. Were you surprised by the size of the problem?
We weren’t too surprised at the estimate in light of the critical role of trade secrets in the overall confidentiality and proprietary information of companies. As we mention in the report, the pace of innovation from 1990 to 2010 has increased by 40.6 percent, as indicated by the number of patents issued. This increase, coupled with strong, continued investment in R&D in the U.S. and other advanced economies points to the increases in all types of IP, of which trade secrets are just one component.
The report lays out some starkly different scenarios for the future — from a sort of “wild west” scenario where companies have to wall off their information in a world without international rules; to a more open, collaborated environment in which companies can protect their IP. Which direction do you see as more likely?
The scenarios focus on varying weights/impacts of four drivers — regulatory environment for protecting trade secrets; the balance between cyber offense and defense; the openness of “cyber commons” vs a “walled garden” approach; and, the pace of innovation. These scenarios and factors will likely play out at different times and in specific ways. For example, in the latter half of 2013 some multinational corporations and national governments publicly raised the issue of segmenting or walling off parts of their Internet traffic. Companies can use these scenarios in considering different risk mitigation strategies.
Are you optimistic that nation states such as China are taking the issue of trade secrets more seriously, given they agreed at recent high-level meetings with the U.S. that enforcement is essential for ensuring competition and innovation?
The protection of trade secrets is an issue that governments around the world are taking more seriously, as witnessed by recent legislation in the U.S., and the European Commission’s proposed trade secret “directive,” which would define trade secrets and establish EU-wide rules to deal with unauthorized access, disclosure and use of such material. Companies in emerging economies are also increasingly interested in protecting intellectual property.
Given that cyber-espionage and other state-level threats are likely to persist, if not intensify, do you believe companies have the tools necessary to protect themselves and their supply chains from theft?
There are tools and approaches that companies can take today. However, the challenge lies in competing priorities and taking actions in a consistent and comprehensive manner. In 2012, The Conference Board conducted a survey of multinational companies, and 68 percent said trade secret infringement risk was very high, yet only 36 percent said their current approach was effective. Likewise, in the pilot program of our CREATe Leading Practices for IP Protection service, we found that companies generally have policies in place but no supporting business processes to ensure protection of IP.
Are you optimistic that companies are becoming aware enough of the trade secret theft that the threat can someday be minimized, if not eliminated?
We are optimistic that the risks of trade secret theft can be mitigated through increased awareness, education and taking practical steps, as outlined in the framework in the CREATe–PwC report, and through our CREATe Leading Practices for IP Protection service.
Top image: The U.S. National Cybersecurity and Communications Integration Center (Courtesy of Win McNamee/Getty Images)
Pamela Passman is the founding President and Chief Executive Officer of the Center for Responsible Enterprise and Trade (CREATe).