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In 1997, the FBI videotaped the chairman of a Taiwanese company, Four Pillars Enterprise Co., in an Ohio hotel accepting secret documents about Avery Dennison Corp.’s formulas for its adhesive products. Agents watched as he cut the company’s confidential markings off the papers and then discussed what an Avery scientist should steal next, according to court records. Four years later, FBI agents at San Francisco International Airport surrounded two Chinese engineers bound for China carrying satchels allegedly packed with trade secrets from four Silicon Valley firms detailing the manufacture of microprocessors. And in 2003, the U.S. Department of Justice indicted two managers for the Boeing Co.’s rocket launch vehicle system used to carry commercial and military satellites into space. The government alleges that one Boeing manager recruited a Lockheed Martin Corp. engineer to bring secret Lockheed documents to Boeing in exchange for a better job at higher pay. The criminal trial is set for June, but disclosure cost Boeing a $1 billion Air Force contract. U.S. v. Branch, No. CR03-715RSWL (C.D. Calif.). “Economic espionage is huge and it is not going away,” said Steven Fink, observing the trend as president of the crisis management firm Lexicon Communications Corp. in Pasadena, Calif. Yet victimized companies remain reticent to come forward, fearing prosecution would expose their trade secrets and damage their corporate image. The companies “have been appalled at the cavalier way [the FBI and federal prosecutors] handled their trade secrets,” Fink said. “They feel they are more at risk for getting trade secrets exposed by coming forward than just sweeping it under the rug.” Traditionally, trade secret theft has been the stuff of civil litigation in state courts around the country, usually by companies fearful that a former employee might take the corporate crown jewels to a competitor. But civil suits lack the power of a federal prosecutor using wiretaps, undercover agents and surveillance. Congress stepped in a decade ago, when researchers estimated intellectual property losses from economic espionage had reached $24 billion. Lawmakers passed the Economic Espionage Act of 1996, 18 U.S.C. 1831-1839, which criminalized both economic spying intended to benefit a foreign government and the theft of trade secrets. As of 2000, American businesses claimed to have lost as much as $250 billion in sales to trade secret theft. But to date only two prosecutions have alleged industrial spying intended to benefit a foreign power, while two dozen have charged simply theft of trade secrets, without the foreign component. “If you ask companies you get a wide range of opinions about the necessity of the statute,” said Eric Dubelier, a partner in the Washington office of Reed Smith, who defended the first foreign economic espionage case brought in the United States, U.S. v. Yang, No. 00-3125 (N.D. Ohio), the Four Pillars case. “Some companies say it is working great for them; others say it was a nightmare,” he said. The law “is a big stick,” he continued, but once prosecutors get involved, victim companies can’t dictate what will happen. “There is no way to stop the train once it is on the tracks.” For the FBI and prosecutors, linking the thefts to any benefit to a foreign country can be tough. David Szady, a 33-year veteran FBI spycatcher and retired deputy director of counterintelligence, now with Perot Systems Corp. in Plano, Texas, said, “If you are dealing with a foreign government you may have to show their hand in it-that this cooperation was orchestrated or run by a foreign country. It can be dicey to show that connection.” CHIP initiative Ross Nadel, a former federal prosecutor who organized the nation’s first Computer Hacking and Intellectual Property (CHIP) unit in San Jose, Calif., in 2000, faced a tough fight just to get into court with the first criminal prosecution alleging economic espionage involving benefit to a foreign government. That was in the case of Fei Ye and Ming Zhong, the two men stopped at the San Francisco airport on the way to China allegedly carrying purloined high-tech secrets. Their defense lawyers demanded to depose experts from the victim companies about the nature of the trade secrets. The case was one of the pair brought under the 1996 law that alleged the spying would benefit a foreign country, even though China is not accused of any role in the espionage. Nadel, now with Cooley Godward’s San Francisco office, challenged the request in 2004 and took the fight to guard the trade secrets to the 9th U.S. Circuit Court of Appeals before the trial even started. Victory was crucial for the government. “If a criminal suspect can get the victim to go into graphic detail about trade secrets, it is the type of thing that would drive victims away from cooperating with the government,” he said. In February, the appeals court sided with the government and refused to allow the defense questioning. U.S. v. Ye, 436 F.3d 1117 (9th Cir. 2006). It is that sort of “big win” the government needs to reassure victim companies they can come forward and cooperate without further damage, Fink said. The CHIP unit was developed in response to companies’ skepticism about how well prosecutors handled cases, Nadel said. Years ago, “the U.S. attorney’s office didn’t have the specialization to effectively prosecute cases, so victims had legitimate concerns.” Protective orders available Prosecutors now have a number of tools to increase the corporate comfort level about cooperation. “One is to use protective orders,” Nadel said. “That prevents further dissemination. It is something this district court [in Northern California] has used in virtually every trade secret prosecution.” The orders can require that defense lawyers view material only in the prosecutor’s office, or that parties with access to secret material must sign acknowledgements that they would face criminal sanctions if they disclose the information, he said. Extensive discussions by prosecutors with victim companies about how the case will proceed, including likely pitfalls, go a long way to reassuring executives, Nadel added. Some of the biggest successes may be the ones that never come to light. In a handful of cases in Northern California, companies fearful that a former employee was about to leave the country with trade secrets went immediately to federal investigators, he said. “The FBI really reacted quickly to recover the secret with a border search at the airport before it got out of the country,” Nadel said. “But that meant they had not let the act go far enough to prosecute,” he said. “It never got any publicity and the victim companies were, without exception, grateful and very relieved.” The FBI is moving beyond the Cold War focus on protecting government secrets to also protect trade secrets of strategic and commercial value. “We found over time our program in counterintelligence focused on being reactive,” said Kevin Favreau, chief of the FBI’s effort to educate private industry and public institutions such as universities about their vulnerabilities to espionage and trade secret theft. His unit operates within the counterintelligence division. “We rolled out the fire truck after the secrets had already gone overseas,” he said. “That was too late.” Foreign intelligence agencies engaged in commercial espionage may solicit information through blackmail or by buying it, he said. “Many countries would rather steal than spend billions of dollars for research and development. They may send students or delegations from front companies to do that.” The FBI has stepped up its meetings with companies to talk about the issue. With the U.S. Defense Department looking to the private sector to develop weapons, big companies get billions of dollars and filter it to subcontractors, Favreau said. “The private sector doesn’t understand what the threat is to them.” While companies emphasize locks, passwords and physical security, they may not realize “the greatest threat to them is from the inside-their own employees or foreign students and visitors,” he said.

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