12 June 2006

Outsourcing: New Consideration for Protecting Trade Secrets...

In a recent dialogue at an industry conference, the topic focused one afternoon on "outsourcing information-based services". The fifty or so executives were comprised of some of America's largest companies and most valuable brands including Nike, Starbucks, Wells Fargo, Microsoft and Visa.

As the discussion turned to the information security and intellectual property concerns, the mood began to change. Should we be engaging in offshore and outsource contracts with companies who are not based in the United States? What about the rule of law in those countries? And that is when this hand went up. It was more of a comment and less of a question:

"Any US company considering an outsourcing relationship with a foreign counterpart or business entity needs to revisit The Economic Espionage Act of 1996. The theft of trade secrets and corporate espionage is the number two issue at the FBI and for good reason. Unknown to many, our trade secrets, brands, ideas, formulas, algorithms and software code are being stolen by criminals all over the globe and right under our noses." The problem begins with a naivety or ignorance of the current definition of Trade Secret:

The definition of the term "trade secret" under the EEA is very broad. As defined at 18 U.S.C. § 1839, it includes, generally, all types of information, however stored or maintained, which the owner has taken reasonable measures to keep secret and which has independent economic value:

(3) the term "trade secret" means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if --

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.


The most recent numbers of the impact on the US economy is staggering:

Economic Espionage is as real a threat as terrorism or global warming. But it is subtle, insidious and stealthy. Even if the United States finds the will to come to grips with the many threats it faces, this silent, invisible hemorrhaging of intellectual know-how and trade secrets could deliver the death blow to our pre-eminent place in the global economic world before we even wake up to the magnitude of the danger.

According to the U.S. Commerce Department, intellectual property theft is estimated to top $250 billion annually (equivalent to the impact of another four Katrinas), and also costs the United States approximately 750,000 jobs, while the International Chamber of Commerce puts the global fiscal loss at more than $600 billion a year. But both estimates appear to be woefully underestimated; by some other estimates, there was over $251 billion worth of intellectual property lost or illegal property seized in August 2005 alone.


In the pursuit of saving a few percentage points in profitability, we could actually be losing money. The Board of Directors are looking at results and Wall Street demands that you get a handle on volatility. The group of saavy executives acknowledged that the operational risk does soar when vital transaction processing is carried out abroad. However, it is risk accepted for various types of outsourced operations. The question remains, how many US companies have software code being developed for various applications being deployed across the globe for the benefit of our own economy? In your next meeting with your CISO, CIO or head of Risk Management, read the latest intel on intellectual property theft and discuss it with your General Counsel. Make sure you have a sound outsourcing plan and the countermeasures to keep your precious zero's and one's safe and secure. It's an issue of national security as much as it is a strategy to boost the corporate bottom line.

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