THEFT OF INTELLECTUAL PROPERTY

March 17, 2016


In 1985 I was self employed, as I am now, as a consulting engineer.  That year, being my “rookie” year, was one in which I had a great deal to learn.  One painful learning experience involved theft of intellectual property—MY PROPERTY.  I suppose in hindsight it was good it happened early in my company’s history but the memories of that event remain very much etched in my psyche.

The company involved, we will call them Company “A”, manufactured microwave (MW) ovens; many hundreds of MWs each day.  Company “A” had very personnel-intensive assembly lines with many “hands-on” operations.   They recognized that automation could save them hundreds if not thousands of dollars on a daily basis.  My company developed robotic systems to automate manufacturing processes.  It seemed like a good fit.

I had called on them several times prior to receiving a telephone call one afternoon asking if I could come for another visit to discuss a project preparatory to quoting.  I scheduled an appointment two hours later in the same day. (Cash flow is a huge issue for any company and particularly a new, fledgling company.)

The project involved rotation a partially-assembled MW door so additional components could be installed prior to final assembly.  As with any company, they ask me to provide several options with accompanying cost projections for each.  There were three viable possibilities with varying complexity that satisfied their demands for production times and degrees of employee involvement.  After three weeks of design work and drafting, I presented each option to the purchasing manager of Company “A”.  I was assured the appropriate individuals would review my work and the options and make a decision quickly so I could order parts and start fabrication of the robotic superstructure.  A week went by, then two weeks, then a month, then six weeks until finally I get a phone call.  This is just about how it went.

PURCHASING AGENT:  Hey, can you come down to take a look at another project and possible provide a quote?

CIELO TECH:  How about the quote I furnished five weeks ago?  Are you going ahead with that one?

PURCHASING AGENT: We are still deciding on which option we want to use.  This one is still in the works but we do feel you can do the work and we are very satisfied with your second option.

CIELO TECH:  OK, good. I will be down tomorrow afternoon.  (I don’t remember the time but that’s of no real consequence at this point.)

I made the visit the next day.  We again, went to their assembly line to get a better picture of the job they wished me to look at and eventually quote.   It was a fairly simple hold-down fixture requiring installation of rivets attaching four mating brackets.  Not that complex but a good project and if you can automate the process you are better off for it.  I was given all of the parts necessary to design my fixture but while walking back to his office, he was paged to answer an emergency phone call.  One that could not wait.  During those days, there were no cell phones so he answered the call from a desk phone located at the head of an adjacent assembly line.  The phone call lasted for several minutes and during that period of time I was approached by an employee asking if I could come take a look at the system I had just installed.  JUST INSTALLED!  It apparently needed a slight adjustment—tweaking.  A great deal of confusion swelled up and as I got closer to the adjacent assembly line I realize that MY robotic system was running and running wide open.  MY SYSTEM.  The purchasing agent caught up with us.

PURCHASING AGENT:  You are not supposed to be here.

CIELO TECH:  I can understand why.  This is my system.  Who built it and why was my design used?

The employee was truly baffled and embarrassed and slowly moved back to his work cell after receiving looks that could kill from the purchasing agent.  My questions were not answered but one comment was given.

PURCHASING AGENT:  You can sue us if you wish but you won’t win.  We can keep this thing in court long enough to bankrupt you.  You know that.

I did know that. He was correct.  To prosecute the theft would have tied me up for years and taken a tremendous amount of time and creative capital.  I simply did not have the time to recoup my investment.   I left, never to return.  About a year later, Company “A” moved their production to China.   I had provided too much detailed information and my designs were very easy to fabricate. Lesson learned.  I’m sure he was a hero to his management and boasted on how much money he saved the company.  The fact that his actions were very much immoral had no real concern to him and his management cared not one whit.

QUESTION:  Just how big is intellectual property theft and counterfeiting in our country today?  As Senator Bernie Sanders would say:  “It’s YHUGGGGGGE”.  Let’s take a look.

THE THREAT:

According to ABC News, counterfeiting has become a one-trillion-dollar industry globally, and has deprived governments of much needed tax revenue. The United States alone loses 250 billion dollars a year to various types of intellectual property theft, resulting in the loss of 750,000 jobs nationally. In the music industry, the people who suffer the most from pirating are neither the musicians nor the companies. Instead, low- or mid-level employees, like song writers and sound designers, are left without a job because of sales that are lost to illegal downloads.  According to the Crime Prevention Council:

“Not only is the United States the wealthiest country on Earth, but it is also the world’s greatest producer of intellectual property. American artists, entrepreneurs, inventors, and researchers have created a nation with a rich cultural fabric. Every day, Americans can avail themselves of consumer goods, entertainment, business systems, health care and safety systems and products, and a national defense structure that are the envy of the world. It is frequently said that the American imagination knows no bounds, and that is probably true. In fact, the U.S. Patent Office recently issued its eight millionth patent (Cyber Attacks and Intellectual Property Theft, Defense Tech, August 22, 2011). The U.S. Copyright Office has issued more than 33.6 million copyrights to date (U.S. Copyright Office).  The U.S. Chamber of Commerce Intellectual Property Center has calculated the worth of intellectual property in the United States as being between $5 trillion and $5.5 trillion (Counterfeiting and Piracy: How Pervasive Is It?, Electrical Contractor magazine, 2008, retrieved November 12, 2011).

More than 250,000 more people could be employed in the U.S. automotive industry if it weren’t for the trade in counterfeit parts (Counterfeit Goods and Their Potential Financing of International Terrorism). According to the Council of State Governments (Intellectual Property Theft: An Economic Antagonist, September 7, 2011), the U.S. economy loses $58 billion each year to copyright infringement alone—crimes that affect creative works. That includes $16 billion in the loss of revenue to copyright owners and $3 billion in lost tax revenue. Furthermore, the problem is transnational: The U.S. Department of Commerce puts the value of fake products—such as CDs, DVDs, software, electronic equipment, pharmaceuticals, and auto products—at five to seven percent of world trade.

This one really scares me. The U.S. Food and Drug Administration estimates 15 percent of the pharmaceuticals that enter the United States each year are fakes, with that number having increased 90 percent since 2005 (Counterfeit Drugs: Real Money, Real Risk, Wellescent.com). Some are manufactured domestically, but more than 75 percent of these drugs come from India (Counterfeit Drugs: Real Money, Real Risk, Wellescent.com). Frequently, online pharmacies that distribute fake drugs purport to be located in Canada, but a recent study conducted at the University of Texas found that of 11,000 online sites that claimed to located there, only 214 were actually Canadian (Counterfeit Drugs: Real Money, Real RiskWellescent.com). According to an article published on the Secure Pharma Chain Blog on March 22, 2008 (Counterfeit Pharmaceutical StatisticsSecure Pharma Chain Blog), 60 percent of all counterfeit drugs have no active ingredients, and the U.S. Food and Drug Administration warns that “even a small percentage of counterfeit drugs in the drug supply can pose significant risks to thousands of Americans” (FDA: Drugs: FDA Initiative To Combat Counterfeit Drugs, retrieved November 11, 2011).  Moreover, counterfeit drugs are commonly made and distributed by criminal gangs (Bad Medicine in the MarketAEI Outlook Series, Institute for Policy Research, American Enterprise Institute, retrieved November 11, 2011).

OFFENDERS:

Who are the biggest offenders?  Offenders in foreign countries are the principal source of the threat to United States IP. Production of infringing goods is conducted primarily outside the United States and these items may cross numerous borders prior to delivery to consumers in the United States. The one notable exception is the production of pirated works in the United States for domestic production. The magnitude and type of threat to United States interests varies from country to country. Offenders in China pose the greatest threat to United States interests in terms of the variety of products infringed, the types of threats posed (economic, health and safety, and national security), and the volume of infringing goods produced there. The majority of infringing goods seized by CBP and ICE originated in China. Offenders in China are also the primary foreign threat for theft of trade secrets from United States rights holders. China‘s push for domestic innovation in science and technology appears to be fueling greater appropriation of other country‘s IP. The U.S.-China Economic and Security Review Commission (China Commission) has cautioned that China‘s approach to faster development of sophisticated technology has included the ―aggressive use of industrial espionage   As the globalization and growth of multinational corporations and organizations blurs the distinction between government and commerce, it is difficult to distinguish between foreign-based corporate spying and state-sponsored espionage. Although most observers consider China‘s laws generally adequate for protection of IPR, they believe China‘s enforcement efforts are inadequate. Despite some evidence of improvement in this regard, the threat continues unabated. Offenders in India are notable primarily because of their increasing role in producing counterfeit pharmaceuticals sent to consumers in the United States. Offenders in the tri-border area of South America are a noteworthy threat because of the possible use of content piracy profits to fund terrorist groups, notably Hizballah. The most significant threat to United States interests from offenders in Russia is extensive content piracy, but this is principally an economic threat as the pirated content is consumed domestically in Russia. Distribution and sales of infringing goods are the principal violations in the United States. Except for pirated content, there is limited domestic production of infringing goods. Physical pirated content is commonly produced in the United States because it is more cost effective to create this content domestically than import it from overseas. Printing of sports apparel and paraphernalia for last minute sports events, such as the World Series or Super Bowl, also is common in the United States because there is not enough time to import these goods from other countries.

CONCLUSIONS:

What can be done to halt theft?  Rigorous prosecution of “local” property theft can be accomplished if the theft results from companies originating in the United States.  That must be done.  Off-shore theft from companies around the globe and counterfeiting is much more difficult but could be handled if we were so inclined to do so.  It’s purely political.

As always, I welcome your comments.

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