Progress in Protecting Trade Secrets

Criminal cases are moving through the courts, but companies see the need for still more education of judges and prosecutors.

China is pushing rapidly to meet ambitious targets for developing its high-tech industries in its quest to move its economy up the global value chain and achieve greater self-sufficiency. As it does so, though, leading Taiwan tech companies allege that much of this progress has been accomplished only by poaching their trade secrets, a legally protected form of intellectual property. These companies warn that continued systematic trade theft by Chinese companies could throw the future of Taiwan’s economic competitiveness into serious question.

To address these concerns, Taiwan enacted a revised Trade Secrets Act that took effect in 2013, providing for criminal penalties for violators, and it has also strengthened law enforcement agencies’ investigative powers in trade secrets cases. After more than four years of accumulated experience, these efforts are now beginning to bear fruit as some cases result in convictions and substantial penalties.

The challenge is still growing, however. Trade secrets are increasingly recognized as extremely valuable assets, and many companies now opt to hold the vast majority of their intellectual property in this form rather than as registered patents. Given the huge economic advantages trade theft offers to unscrupulous companies, it remains to be seen how effective the government’s efforts will be in stanching the illegal flow of proprietary information.

Trade secret cases vary widely, but a typical case in Taiwan involves an effort by an emerging company to target the employees of an established technology leader. These employees are lured away with the offer of dramatically increased salaries – often several times more than their previous earnings. Employees in several different departments may be approached in hopes of gaining the broadest possible understanding of the competitor’s technologies and processes.

Trade secrets are also vulnerable to cyberattacks, but tech leaders seem less anxious about this type of threat than of departing employees providing a “present” to their future employer. The gift may take the form of smuggled-out hardware, sensitive files, or photographs revealing confidential information. Sometimes the secrets are simply tucked away in the employees’ own memories.

Incidents of trade theft involving Chinese companies have a long history in Taiwan, but industry insiders say the frequency has increased dramatically in recent years. U.S. chipmaker Micron Technology says that hundreds of past employees have been involved in targeted efforts of trade-secret acquisition. Most recently, prosecutors in early September indicted Taiwanese semiconductor foundry United Microelectronics and three of its employees – two of whom formerly worked for Micron – on suspicion of stealing trade secrets from Micron’s local Taiwan units. The information is believed to have been intended to aid development of Chinese memory-chip manufacturing facilities.

“Some startup companies have an objective to shortcut the learning process, and it will in theory take them to economic viability much sooner, perhaps years sooner than without stolen trade secrets,” says Stephen Drake, Micron’s director of Asia Legal. “We believe the previous thefts already have allowed the offenders to make rapid progress toward their goals of creating memory products to illegally compete against us,” he says.

Some argue that the consequences of this unfair competition has already been wide reaching. “Today a major reason for the low profit margin of Taiwan companies is trade-secret theft,” says Richard Thurston of the law firm of Duane Morris, who was previously general counsel for Taiwan Semiconductor Manufacturing Co. (TSMC). “Taiwan’s core innovations have been and continue to be solid,” he says, warning though that many companies are facing severe brain drains. “If you really scratch beneath the surface, you’d find massive theft.”

Taiwan’s leading semiconductor companies – including TSMC and MediaTek – have been victims in some of the highest profile such cases, but the crime is not limited to one industry. Other major companies whose cases have grabbed headlines include electronics manufacturers Foxconn and AU Optronics, smartphone-maker HTC, and display glass maker Corning.

Observers say that any industry with a significant investment in R&D is vulnerable.

Technology acquisition

Chinese companies are not alone in these efforts. In one major case, TSMC accused a former executive of offering important technology secrets to South Korean rival Samsung. Taiwan’s tech leaders agree, though, that Chinese companies pose the greatest threat, and in recent years their actions have been the most brazen.

To date, no publicly available evidence has turned up to suggest that this corporate theft has been instigated by the Chinese government. However, China’s ambitious development goals, along with the pressure placed on many companies to develop quickly, may be pushing individual executives to adopt trade-secret theft as part of their growth strategy.

China’s massive US$300 billion Made in China 2025 program announced in 2015 demonstrates the sheer magnitude of the resources that the country is willing to bring to bear to reach its goals. The program seeks to spur the growth of 10 emerging industries, including artificial intelligence, integrated circuits, bio-pharmaceuticals, and 5G mobile communications. Government assistance is available to finance low-interest loans, technological research, and the acquisition of foreign competitors.

The semiconductor industry has been a particular focus for China. The sector has been offered additional funds at both the national and provincial levels in the hope of shifting the country away from its heavy reliance on foreign chip manufacturers. These moves have riled countries around the world, leading to accusations that China’s government subsidies amount to unfair trade competition that will disrupt existing markets.

Even with the government funding, though, efforts to acquire the needed technologies and expertise for chip manufacturing have met with only limited success. Regulatory barriers in Taiwan and elsewhere – or sometimes just the possibility of regulatory action – have frustrated the efforts of Chinese investors to acquire semiconductor companies in other markets. Attempts to purchase technology licenses have also failed in many cases.

Thus many emerging Chinese chip companies are suspected of attempting to fill the technology gap through the only means left: theft. Taiwan is thought to be especially vulnerable due to its proximity to China and common language.

Leading Taiwanese chip manufacturer Nanya Technology says its trade secrets have been targeted by two upstart chip manufacturers in China – Fujian Jinhua Integrated Circuit Co. and Hefei Rui-Li Integrated Circuit – and that to date it has lost about 50 employees to targeted poaching efforts. “We know that they are not able to find any company to license technology, so they don’t have any technology source,” says Nanya Technology president Lee Pei-ing. “However, their projects continue. Their construction also continues.”

The speed with which these Chinese companies have developed is also a source of suspicion. Given the complexity of memory technology production, several years of development and research are typically needed before production can begin. However, in the case of the two companies targeting Nanya employees, both began construction in 2016 and are expected to launch production next year.

Taiwan’s own tech industries only took shape following huge investments in technology licenses and years of research. One industry insider with knowledge of trade-secret theft cases notes that the Chinese enterprises appear to have spent almost nothing, so either they are “super, super geniuses” or have found an illicit shortcut.

Strengthening protection

Before the Trade Secrets Act was amended, industry representatives felt that existing penalties offered inadequate deterrence. In one famous case involving MediaTek, a former employee convicted of trade theft was handed a fine of NT$270,000 (US$9,000) for stealing trade secrets the company reportedly spent NT$10 billion (US$333 million) in developing.

Now violators face as many as five years in prison and possible fines of NT$10 million (US$333,000). When trade secrets are taken overseas, the maximum sentence increases to 10 years in prison and a potential fine of NT$50 million (US$1.67 million). On top of the increased penalties, analysts say the new legal framework offers a clearer standard for identifying trade-theft violations and a better chance of successful prosecution.

Supporters of these changes express the hope that the strengthened penalties will send a message to would-be trade-secret thieves that their actions will be dealt with seriously, as they have the potential to seriously harm Taiwan’s economy.

Supporting legislation has since been passed strengthening the hand of law enforcement in several ways. It empowers prosecutors to grant partial immunity to induce co-conspirators to cooperate with investigations, permits the use of electronic surveillance to gather evidence in some cases, and modifies criminal procedures to increase pressure on accused infringers to provide a substantive response to allegations of trade-theft instead of simply making a perfunctory denial.

Meanwhile, the Ministry of Justice Investigation Bureau (MJIB), Taiwan’s national criminal-investigation agency, has also increased its focus on the topic. It is seeking to coordinate the investigation efforts of relevant offices including its Cyber Forensics Laboratory and Financial Intelligence Unit.

In the four years since the amended version of the Trade Secrets Act was passed, well over a hundred trade-secret cases have been brought to the MJIB. But a much smaller number have resulted in actual investigations, and of those only a handful have yet reached a final verdict. According to MJIB statistics, between 2013 and August 2017, the bureau identified and investigated 57 cases of trade-secret theft, of which 30 cases produced indictments. Among those, 11 cases have already been dropped, 16 are ongoing, and seven have reached a final conclusion, including two cases where the defendant settled out of court.

Only five cases resulted in final sentences involving prison terms, one of which was reprieved.

MJIB officials explain that when cases are not pursued, the reason most often is either that the accusing company has decided to drop charges, or that the cases failed to meet the legal requirements to qualify as criminal trade-secret theft. Under those requirements, companies must demonstrate 1) that a stolen secret is not general knowledge, 2) that the secret has some economic benefit, and 3) that the company had taken reasonable efforts to maintain its secrecy.

Often, cases fail because companies had not taken proper steps to convince authorities that a trade secret exists and that they actively tried to protect it.

The last four years have been a learning process for judicial authorities, who are being newly exposed to complicated, technical disputes, as well as for the business community, which has had to learn how to work with investigators to provide needed evidence and information. “It’s a very new law, and we are still accumulating cases and experience,” says Wu Jung-chun, who directs the MJIB’s Economic Crime Prevention Division.

The MJIB says it is working to develop relationships with companies to speed up this learning process and to encourage best practices in trade-secret protection at the company level. “Many companies invest a lot in R&D, but then they fail to protect the technology they have developed,” says Lin Wei-cheng, also of the Economic Crime Prevention Division. “For example, many engineers will take their work home with them. Companies are not being as careful as they should be.”

Private-sector experts in the field agree. “Taiwan is still in the dark ages of trade-secret protection at the corporate level,” says Thurston. “Very few companies have trade-secret policies. Very few have ethics policies that include trade secrets and other intellectual properties. Most companies don’t even know what their trade secrets are.”

Employee education

Legal advisers urge companies to do more to educate employees about the corporate trade-secret policy and to add non-disclosure agreements in employee contracts – steps that help demonstrate to prosecutors that the company has indeed taken “reasonable efforts” toward protection. In addition, companies are advised to boost physical and cyber security by installing monitoring systems and metal-detector gates or placing restrictions on employees’ use of social media.

These efforts are of course expensive and require concerted attention from corporate leadership, but the work already seems to be paying off at some companies. Over the last year, for example, Nanya has invested millions of U.S. dollars in boosting its trade-secret security and also increasing compensation as a means of encouraging employees to remain. The efforts are regarded as having brought positive results.

The Trade Secrets Act may soon be amended again, but most observers agree that the proposed changes are largely peripheral. In fact, companies generally report satisfaction with the current laws as written, and are more concerned about enforcement. “We found that there are gaps between the private sector’s interpretation of the law and that of the law-enforcing entities,” says TSMC General Counsel Sylvia Fang.

Those gaps exist mainly because of the highly technical nature of trade-secret cases, which often require a detailed understanding of industry standards and technologies. Those working in Taiwan’s judicial system naturally come from a very different background, and may have a very different perspective. To those in the industry, it might seem like common sense that certain patterns of behavior are reasons for suspicion that trade-secret theft is taking place. But law-enforcement officers or prosecutors “may expect a level of proof that from our point of view is unreasonable,” says Fang. “That kind of gap is something we’ve been working very hard to close.”

Industry members say judges can also be overly cautious in their handling of proceedings. “Most judges don’t understand that the impact of the theft to the company could lead to the loss of hundreds of jobs,” says one observer. As a result, many judges are reluctant to issue criminal penalties, especially when the only physical object to be stolen was a flash drive or a data set.

To help the industry better promote trade-secret protection, TSMC and seven other companies in 2015 founded the Taiwan Association for Trade Secret Protection, now chaired by Fang. It has worked to improve trade-secret education by holding seminars to communicate with legal authorities and to spread knowledge of best practices. Some companies have invited judges to their production facilities to help familiarize them with their operations and the critical nature of their trade secrets.

TSMC, which started to devote attention to the problem a full 20 years ago, is widely regarded as having one of Taiwan’s best trade-secret protection systems. But the company still sees the need to promote the concept of trade-secret protection more broadly within Taiwan. “If everyone is more aligned in Taiwan, then it will indirectly benefit TSMC as it works with other companies,” says Fang. “We have a lot of vendors as part of our supply chain, and we also have a lot of customers. If Taiwanese companies know how to protect their trade secrets better, this would benefit TSMC as well.”

A major frustration for those affected by trade-secret piracy is that overseas entities are usually beyond the reach of Taiwanese prosecutors. If violators have no physical presence in Taiwan, victims must file complaints in foreign jurisdictions. “But of course, without political pressure of some kind, China won’t prosecute those cases,” says Stephen Drake of Micron.

The MJIB says it works with investigators in other countries on trade-secret cases, though it declined to provide details. Taiwan’s relative diplomatic isolation may limit the cooperation that it can expect in such cases. Drake notes, however, that the U.S. Federal Bureau of Investigation (FBI) seeks to assist American companies confronted by major trade-secret theft. “In some cases the FBI has investigatory tools that are different from what the local authorities have, and in some of our cases the MJIB and the FBI are actually working together,” he says.

Nanya Technology’s Lee questions whether efforts by Taiwan itself can be sufficient. “This really needs international attention,” he says, urging coordination among Taiwan, the United States, South Korea, and perhaps even China. “Otherwise all these efforts will fail to have a bigger impact.”

In fact, while official cross-Strait cooperation on this issue seems nonexistent at this point, TSMC’s Fang sees encouraging signs that China may be ready to address trade-secret issues on its own. “Many Chinese companies are actually leaders in their industry now, and their R&D investment is huge,” says Fang, adding that the Chinese government has been quite responsive to TSMC’s requests related to IP protection. “They still have a long way to go, but they are starting to realize that better protection of IP is also good for Chinese companies.”

If Micron can win its cases in Taiwan, Drake says, the next step will be to attempt to prosecute offenders under Chinese law. “China also has a theft of trade secrets law, and we’d like to see if the China government will enforce that law and provide us, as a member of China’s semiconductor industry – which we are, we’ve been there a number of years – the same benefits as they do domestic companies.”

“We’d like to give the China government an opportunity to do the right thing,” he says.

— TOPICS thanks Richard Thurston of Duane Morris LLP and Christine Chen of Winkler Partners for assistance regarding legal issues in the preparation of this report.

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