The Spies Who Loved Me (And My Trade Secrets): A Brief History Of Industrial Espionage

by Orrick - Trade Secrets Group
Contact Chinese cyber attacks, data security, and industrial espionage occupying more and more space in the headlines, companies are re-evaluating their strategies for guarding sensitive information. There is certain to be more coverage of these issues in the weeks and months ahead — and as usual, we’ll bring you the news and our take on it as it breaks. But as regular Trade Secrets Watch readers know, we also sometimes like to look back at how we got to where we are today. This post examines the historical roots of industrial espionage to offer context on a hot and ever-changing area of concern for trade secrets owners.

Interestingly, the first reported case of industrial espionage involved trade secrets stolen from China, when in 1712 a Jesuit priest discovered the Chinese secret for manufacturing porcelain. He promptly sent the manufacturing details and materials samples to Europe, where they were shared with European merchants.

Another early example of industrial espionage came about in the late eighteenth century, when France found itself attempting to compete with the emerging industrial strength of Great Britain. The French government surreptitiously placed apprentices in English iron and steel yards to abscond with production formulas. To maintain its market dominance, Britain became the first country to pass legislation aimed at preventing industrial espionage.

In the United States, American businesses employed former Pinkerton detectives to uncover employee theft after the Civil War. And during the 1920s, anxiety over Communist and unionist upheaval caused companies to hire double agents to expose internal threats. According to a report by the U.S. Senate Committee on Education and Labor, a majority of American companies had placed labor spies in their plants and unions around that time.

As labor-management tensions started to ease after World War II, American companies shifted their focus away from themselves and began spying on competitors. Industrial espionage began to follow one of two familiar patterns: (1) a former employee would misappropriate confidential information before departing for a competitor, or (2) a competitor would place a “mole” inside an organization to gain access to corporate secrets.

Industrial espionage became a global affair during the Cold War, as U.S. businesses faced threats from Soviet spies and multinational competitors alike. For example, in 1982 six executives from the Japanese firms Hitachi and Mitsubishi were arrested in Santa Clara, California, for allegedly trying to steal computer parts from IBM. Companies also became increasingly worried about executives overseas defecting to competitors. A dispute between General Motors and Volkswagen arose when a group of GM executives in Germany left GM to join VW. Upon seeing similar designs in VW’s car models, GM accused VW of using proprietary information gained from its former executives. In one of the largest industrial espionage cases ever, VW settled with GM for $100 million and agreed to buy at least $1 billion worth of car parts from the company.

Following the collapse of the Soviet Union, some companies began hiring “underemployed” government spies to extract secrets from competitors. These spies began deploying modern tactics such as wiretaps, spy satellites, and computer programs. In partial response, Congress passed the federal Economic Espionage Act of 1996 to impose stiffer sanctions for stealing corporate secrets. More recently, spies have developed forms of malware that can control employees’ mobile phone cameras and recording devices. As part of the constant interplay between infiltration and defense, companies developed new safeguarding techniques, like building Faraday cages to shield servers from electromagnetic eavesdropping.

Today, Silicon Valley is one of the most targeted areas for espionage. In addition to critical infrastructure, heavily-targeted industries include biotech, energy, and software. The U.S. government has accused sovereign rivals like China of engaging in state-sponsored espionage. In 2010, for example, Google and at least 20 other companies were targeted in a large-scale cyber attack thought to have originated in China.  And earlier this year, developing countries such as India and North Korea emerged as threats to launch cyber attacks. But it would be naïve to think that the United States is just a target of these attacks; recent reports indicate that it may well be engaged in some industrial espionage of its own. As geopolitics, economics, and technology continue to morph the face of industrial espionage, corporations must remain vigilant to defend trade secrets from prying eyes. While lawmakers continue playing catch-up in response to these developments, it is promising to see increased uniformity across the United States, and increased recognition around the world for the importance of protecting trade secrets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick - Trade Secrets Group | Attorney Advertising

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Orrick - Trade Secrets Group

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