Intellectual property fraud: what can be done to help prevent the fraud from occurring?
By Scot Warren
Updated: 2011-03-01

The CEO looked in disbelief at his company’s latest audio device prototype, representing two years of groundbreaking engineering – its burnished-chrome design the result of months of intensive effort by a team of international experts. Profits had suffered during its development, but the planned release was just four months away. The future of the business was staked on it. Yet, here he was holding it in his hand, having purchased it on eBay! How could something so catastrophic happen?

He called Kroll to find out. An audit of the firm’s manufacturing facility in China, including numerous company-wide interviews, revealed several weaknesses, in particular the way defective products and rejected prototypes were stored. Under the contract with the factory, these items were to be kept in a room until destroyed in the presence of a company representative. Because the defective and rejected goods sat for some time in a room with poor physical security, the temptation to sneak items out past the metal detectors proved too great for some factory employees. Kroll also identified the sellers on eBay and worked up the supply chain until most of it had been found and dismantled.

IP fraud cases in Asia and other developing economies often involve:

Night manufacturing: licensees declaring the products they make during the day, but not those manufactured at night, when enforcement authorities and company representatives are less likely to visit.

Terminated licensees continuing to manufacture the company’s products.

Extortion attempts via email, such as a threat to release sensitive company data or embarrassing personal facts hacked from the company’s system.

Employees leaving with the company’s intellectual property, trade secrets, customer lists, pricing, or other sensitive data at the end of their employment, or new employees bringing such information with them. In one instance, a foreign competitor filed a patent on technology that had taken its arch-rival years to develop, only a few weeks after it had hired a critical group of engineers away from the rival firm.

What can be done to help prevent the fraud from occurring?

Proactive IP Protection

Companies can take several critical steps to protect themselves from the loss of IP:

Conduct an IP Audit

Identify your key IP that needs protection, determine how this is currently being protected, and implement improvements. This includes not only understanding, from a technical perspective, the IP pipeline essential to your company’s success, but also:

Analyzing legal rights on file, where they are registered, and monitoring capabilities.

Reviewing HR policies to ensure that appropriate non-disclosure, non-compete provisions, and IP ownerships Provisions are signed locally when new employees are hired, and that all IP assets are gathered upon termination.

Evaluating IT system access rights and logging policies to electronically-stored data, as well as policies which will allow this information to be copied, especially onto portable media, such as thumb drives.

Examining physical security, locks, cameras, and access to areas where critical IP is kept.

Conducting other evaluations relevant to your particular IP, corporate structure, and environment.

Companies are advised to implement improvements based upon the location of facilities and the risk involved. Do not assume that the policy that has worked in the United States over the years is the same one that should be implemented in China.

When creating your product, consider how you might include IP that is more easily enforceable (such as trademarks) to protect IP that is more challenging to defend in most countries (such as patents and copyrights). This can greatly enhance your ability to thwart fraudulent products and counterfeits.

Know your local partner

Before entrusting your valuable IP to an unknown third-party, conduct a background check on the entity, its key executives and its employees.

Know your supply and manufacturing chain

Among the strategies available here is to implement royalty-tracking devices throughout the supply chain to better insure accurate collection of this income. Furthermore, bring an IP theft expert on site visits to suppliers and manufacturers. Such an expert may notice things that will greatly enhance your IP protection.

A Culture of IP Protection

The overarching goal is to establish a culture of IP protection awareness within your organization and among those with whom you do business. Taking the above steps will guard your IP better. Doing so also sends a clear message that you value your intellectual property, and that your employees and partners should do the same. If people know that you are serious about defending your IP, they will be much less likely to try to abuse your trust in the first place.

Don’t Wait

If intellectual property is a key component of your company’s success, take proactive steps to protect it as soon as possible. All too often companies wait too long to implement IP protection, usually acting only after a significant loss.

Frequently, the company must wait until the next product life cycle in order to recover, assuming that it can do so at all. In the long run, early detection is the best recipe for success.

By Scot Warren, Managing Director of Kroll

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