China isn’t the only country on the hunt for American intellectual property, but it’s the largest and most efficient — and inventors and tech startups in particular need to take precautions.
Colorado Springs’ concentration of military bases and educational institutions makes it an appealing target for foreign actors looking to steal information, according to Shawn Murray, cybersecurity engineer and chief academic officer with Springs-based Murray Security Services & Consulting.
“We’re all concerned with Chinese cyberespionage … they’re very good at offensive cyber: stealing and hacking to further gain an edge within their economy,” he said. “But the strategies other than hacking that the Chinese and other actors use are going to be complex.
“Small and medium[-sized] business owners need to be wary — especially if they’re developing technologies that are sensitive or unique, and that’s their bread and butter. Be wary about the relationships that you’re making and the deals that you’re making.”
In particular, be aware of what Defense Security Service Director Daniel E. Payne calls “the weaponization of business” — joint ventures and overseas deals that open the door for foreign companies to snatch American technology.
“The Chinese have learned to take full advantage of the business cycle to steal technology that they need to upgrade their military services, as well as their intelligence community,” Payne told Law360, a legal news service. “They will use joint ventures to enter into business with companies doing business with [the Department of Defense]. They will use those joint ventures to acquire technology that they don’t have.”
It’s not just DoD contractors at risk. Murray said any company or individual making innovations or sensitive technologies should be on guard.
“Especially with social media like it is today — just look at LinkedIn and social networking — it’s easy to create a profile on someone who’s doing really well and making great contributions,” he said. “They’re publishing articles in journals, they’re going to trade shows, they’re developing unique technologies, but they just don’t have that capital — and that’s where they’re vulnerable.”
Murray explained how startups and inventors are targeted.
“The Chinese will try and establish a partnership with you and your firm and give you the capital you need, because most firms are looking for capital to further advance the technology,” he said. “They’ll … give them lots of resources, lots of money — but they’ll ask for the partnership to be based in China where they can do the manufacturing. And this is where the hook is.
“Once you establish that partnership … they bring your technology and the manufacturing to China and the relationship’s great for maybe a couple of years. When they get all your technology, all your secret sauce, they’ll dissolve the partnership and basically they’ll own all the technology that they funded.”
The technology may have been developed in America by Americans, Murray said, but “because of the [Chinese] partnership they now have all the golden eggs and the goose as well.”
The American partner is “basically out of their own technology, they no longer have a niche — economically it can put them out of business, and there’s really nothing legally they can do, because they partnered with China,” Murray said.
Customer relationships can also be fraught with danger, as American Superconductor discovered.
The company, which developed advanced software to regulate electricity flow to wind turbines, was nearly destroyed by its biggest customer — Chinese wind turbine manufacturer Sinovel Wind Group.
In 2011, the Massachusetts-based American Superconductor discovered Sinovel had bribed a Serbian employee at the company’s Austrian location to reveal source code for the core electrical components for Sinovel’s wind turbines, Forbes reported.
The employee, one of just a handful of people with access to the codes, was swayed by a small bribe of 15,000 euros (about $17,700). As soon as it had the codes, Sinovel cut ties with American Superconductor and refused to pay for contracted shipments, including those it had already received.
Sinovel accounted for 70 percent of American Superconductor’s revenue. Stock prices plummeted on the news, and American Superconductor has brought multiple civil actions in the Chinese courts, with monetary damages totaling more than $1 billion.
All have been dismissed — the most recent, in the Hainan Higher People’s Court, cited “lack of evidence.”
Sinovel pulled off a stunning case of intellectual property theft and economic espionage, but as attorney Michael Martensen warns, too often intellectual property isn’t stolen — it’s given away.
Martensen, a patent attorney with Springs-based law firm Martensen IP, said startups and other companies looking at the international stage should be warned that international intellectual property laws differ in important — and potentially devastating — ways.
The U.S. is one of a handful of countries that uses “grace periods” for disclosure of an invention in its patent system. This means if an applicant files a patent application within 12 months of publicizing the invention, the earlier disclosure does not invalidate the patent application.
The grace period has existed in U.S. patent law for more than 70 years, and many inventors and firms don’t know it doesn’t apply internationally.
“If you announce, disclose, offer for sale, use — all the same things the United States gives you a grace period for — as soon as you do that internationally, the rights are gone … and you can no longer claim any personal right or corporate right to that idea,” Martensen said.
Even disclosure in the U.S. is considered worldwide disclosure.
“So disclosure is a big deal for patents internationally and [companies] often do stumble in it, and then they realize ‘I want international rights,’ and it’s refused,” Martensen said.
Non-disclosure agreements can help, but Martensen cautioned that rules differ even among countries that are members of the World Intellectual Property Organization.
“They try to align the rules with respect to patents and trademarks and copyrights so that as companies do international trade, the rules are essentially the same,” he said. “But every country is a sovereign nation, they will examine every patent, trademark and copyright individually, and you can imagine the rules are not quite the same; there’s always a little bit of difference.”
Another thing to remember: The wheels of patent systems turn slowly everywhere.
“Conservatively, [when] an inventor or a startup in the United States wants an international portfolio, we may not find out until three to four years later that it’s going to be rejected in Europe or in Australia because of a prior disclosure,” Martensen said. “It’s money spent. You can’t recover the money. For a little better planning and understanding of what the rules are, they could have precluded a lot of this — not [only] the cost, but also the gaining of the rights internationally.”
Ultimately, not many companies are well positioned to establish robust international portfolios, in no small part because of the expense.
“It can be hundreds of thousands of dollars,” Martensen said. “You can take a U.S. portfolio and add a zero to it, sometimes, if you want to have it internationally.”
Many companies think an international portfolio will make them more attractive as an acquisition, and with the right international product and the right acquiring company, that can be true.
“But that’s not always the case, and you can spend hundreds of thousands of dollars to develop an international portfolio and not get your realization of that income. It is definitely a huge business decision whether or not you want to file for that international portfolio or international protection,” Martensen said.
Because decisions on U.S. patents and international patents must be made simultaneously, companies would ideally plan intellectual property protection well in advance.
“But for most startups cash is king — they want to keep the lights on, pay the rent, pay the employees, and they think [patents] are luxury items that they can put off,” Martensen said. “We typically walk before we run, so we identify their core intellectual property and try to protect that as much as we can. We try to protect the fundamentals — maybe the U.S. market first, and then think about these other things.”
And not everyone needs international patent protection.
“There are reasons to have them, reasons not to have them,” Martensen said. “There are strategic advantages in both, and you have to make informed decisions.”