CHAPTER 3 THE THEFT OF TRADE SECRETS: EVIDENCE FROM THE
3.9.3 Cluster 3: Cases Where Neither Patents nor Copyright Were Available
These final two cases are prime examples of trade secrets that could not have been protected by other forms of IP. In both cases, the victim firm was
dependent on trade secrecy for maintaining this confidential information.
165 Letter to Hon. Solomon Oliver, Jr. from Greg Lewis, Corporate Vice President of Lubrizol, Re:
United States v. Kyung J. Kim, dated November 10, 2008, Document 10 in USA v. Kim, 1:08-‐cr-‐
00139-‐SO-‐1, filed 26/03/2008 in N.D. OH.
166 Lubrizol description, available from http://seekingalpha.com/symbol/lz/description
167 Sims, Damon (November 22, 2008) “Lubrizol Corp. worker gets prison for selling trade secrets to competitor,” Cleveland.com available from http://blog.cleveland.com/metro//print.html
168 Ibid.
169 Lubrizol description, available from http://seekingalpha.com/symbol/lz/description
The Boeing Case: U.S. v. Erskine and Branch170
The Boeing Case is a high profile case of the theft of trade secrets by employees.
In this EEA case, Erskine, a 43-‐year-‐old Boeing employee, recruited Branch, a 64-‐
year-‐old Lockheed Martin (Boeing’s top competitor) employee, to bring proprietary Lockheed documents to Boeing. At the time, the two companies were in a bidding war for U.S. government military contracts for Evolved Expendable Launch Vehicles (EELV) worth $2 billion.171 In an unwritten deal, Erskine stole Lockheed bid information documents and gave them to his new employer in return for a 7.5% raise over his salary at Lockheed. Boeing then submitted a bid for the EELV contracts armed with this information. As Oliver (2009) reports, “It was generally believed that Lockheed was the superior rocket builder. However, Boeing had lower prices and won 19 of the first 28 EELV launches.”
The theft was uncovered when another employee, whose wife worked at
Lockheed, saw the documents and reported them to Boeing’s legal department.
The matter was initially investigated internally at Boeing in 1999, and later by Air Force personnel who reported identifying 3,800 pages of Lockheed
documents.172 Branch and Erskine were fired in 1999 and indicted in 2003.
This case demonstrates the value of trade secrets for the manufacturing and constructing sectors. Bid information falls into the category of Confidential Business Information and does not meet the originality standards for copyright, nor is it of a patentable nature. Thus, Lockheed could only rely on trade secrecy and security measures to protect this information. As the DOJ press release reports, “Seven of the documents appeared to be related to the manufacturing costs of the Lockheed Martin EELV and, in the opinion of USAF EELV staff, possession of these proprietary documents could have had a ‘high’ or significant chance of affecting the outcome of a competitive bid.” Furthermore, these
170 USA v. Branch, 2:03-‐cr-‐00715-‐RSWL-‐1, filed 17/07/2003 in C.D. CA.
171 Department of Justice press release (June 25, 2003) “Two Former Boeing Managers Charged in Plot to Setal trade Secrets from Lockheed Martin.”
172 Oliver, Douglas L. (2009), “Engineers and White-‐Collar Crime,” Journal of Legal Affairs and Dispute Resolution in Engineering and Construction, February 2009, p. 36.
documents were marked “Lockheed Martin Proprietary of Competition
Sensitive” and Lockheed had taken adequate steps to protect the trade secrets.
The Boeing case also highlights the issues of labour mobility as a source of the loss of trade secrecy. When Boeing merged with McDonnell Douglas in 1997, another aerospace and defence manufacturer, the market took another step towards becoming a duopoly. As Zuker (2004) argues, the market for defence contracts essentially functions with two dominant contractors, Boeing and Lockheed. Thus, these two companies dominate the market for the highly
specialized skills of aerospace engineers. “With only a handful of rocket builders in the United States, job switchers often moved from one competitor to
another.”173 The mobility of employees between the two companies means that former employees represent a potential source of leaks. Indeed, Jennings (2009) reports that, in 1997, “Lockheed sent Mr. Branch a letter reminding him of his confidentiality agreement with Lockheed and his duty not to disclose any proprietary information in his new position at Boeing.”174
An interesting point of this case is the damage it caused Boeing. While it would appear that Boeing initially benefited from the use of Lockheed’s trade secrets, the long-‐term cost to the firm was immense. To begin with, Erskine and Branch unsuccessfully sued Boeing for wrongful termination. After the internal
investigation in 1999, Boeing officially notified the Air Force that it possessed Lockheed documents but “failed to disclose the quantity and importance of these documents.”175 It was not until 2002 and 2003 that Boeing disclosed that it still possessed Lockheed documents and their nature. As a result, in 2003 the Air Force denied Boeing roughly $1 billion in contracts.176 Furthermore, in
combination with other scandals associated with Boeing, these actions resulted in the company paying a $615 million settlement to the U.S. Government in
173 Bowermaster, David (January 9, 2005), “Boeing probe intensifies over secret Lockheed thesiss,” The Seattle Times, p. 2.
174 Jennings, Marianne M. (2009) Business Ethics: Case Studies and Selected Readings, South-
Western College, United States, p. 130.
175 Zucker, Major Jennifer S. (2004), “The Boeing Suspension: Has Increased Consolidation Tied the Department of Defense’s Hands?”, The Army Lawyer, April 2004, p. 21.
176 Oliver (2009), p. 36.
2006.177 While there was also discussion of Boeing seeking a tax write-‐off for this $615 million payment, the government ultimately succeeded in maintaining a tax-‐neutral approach.178 The cost to Boeing of allowing and benefiting from the use of a competitor’s trade secrets includes the loss of contracts, the $615 million payment to the government and long-‐term reputational costs.
The motivations of Branch include money and ingratiation. Branch used his position at Lockheed to gain access to trade secrets, which he then leveraged to secure a higher-‐paying position at Boeing. Furthermore, Branch was flown up to the EELV project’s headquarters 43 times over 18 months to meet with Boeing executives, where the topic of discussion was the Lockheed secrets and the bidding process.179 These meetings suggest that Branch used his knowledge to ingratiate himself further with his superiors and that Boeing was aware of Branch’s possession of Lockheed’s confidential information. Erskine’s
motivations are less clear. While he does not appear to have benefited from the spying directly, Erskine may have received financial benefits in the form of performance-‐related bonuses or recognition within the firm.
This case also brings up issues of company culture and ethics. The employee who reported the theft internally stated that, “he was stunned by Erskine’s story, especially since he and Erskine had just completed ethics training. But he said that Erskine told him he was ‘hired to win’ and ‘was going to do whatever it took.’” An employee who initially reported seeing Lockheed documents in 1997 was reprimanded.180 Boeing’s three-‐year delay in disclosing the documents fully and their admissions that “at least 10 of its workers were aware Branch
possessed stolen Lockheed documents”181 point to a company culture that encouraged underhand techniques. As Wheeler (in Schlegel and Weisburd,
177 See Deputy Attorney General Paul J. McNulty’s statement before the Senate Committee on Armed Services August 1, 2008 for further details.
178 Ibid., tax-‐neutral meaning that the IRS received the same amount of taxes as it would have had Boeing not had to pay the settlement fee.
179 Bowermaster, David (January 9, 2005), “Boeing probe intensifies over secret Lockheed thesis,” The Seattle Times.
180 Jennings (2009), p. 130.
181 Bowermaster, David (January 9, 2005), “Boeing probe intensifies over secret Lockheed thesis,” The Seattle Times.
1992) notes, “People will commit crimes the greater the frequency, duration and intensity of their contact with others who condone or participate in criminal activity.”182 The company culture that condoned these and other actions cost Boeing at least $1.6 billion. Branch and Erskine faired relatively well as the EEA charges were eventually dropped, although Branch was convicted of a separate charge.
The $8 Million Dollar Company: U.S. v. Lange183
“You must admit it is nice to have an $8 million company handed to you (I see a smile on your face.)”184 This is what Lange, aged 24, reportedly told a competitor of the company whose technical information he was attempting to sell. In 1999, Lange, a sub-‐contracted draftsman, attempted to sell measurements and
manufacturing data required to make copies of RAPCO, an aircraft parts manufacturer, certified parts. The competitor to whom Lange initially tried to sell these documents reported the incident to the FBI. After attempting to sell the documents for $100,000 in an FBI sting, Lange was arrested.
This case is unique in that Lange appealed the decision by arguing that RAPCO’s trade secrets did not meet the necessary standards of trade secrecy. Arguing that the RAPCO had not taken the reasonable steps to protect the trade secrets, and that the trade secrets themselves were not secret as they could be reverse engineered, Lange failed in his appeal. The court published an opinion in which the details of RAPCO’s security and confidentiality agreements demonstrated the adequate protection of the trade secrets. Furthermore, “It is by keeping secrets from its rivals that RAPCO captures the returns of its design and testing work.”185 The court further argued that Lange’s attempt to sell the information for
$100,000 demonstrated that the documents had economic value.
182 Wheeler in Schlegel and Weisburd (1992).
183 USA v. Lange, 2:99-‐cr-‐00714-‐JPS-‐1, filed 08/09/1999 in E.D. WI.
184 Halligan, Mark (2001), The Trade Secrets Homepage Espionage Act of 1996 available from tradesecretshompage.com/indict.html
185 Circuit Judges Cudahy, Easterbrook and Ripple, U.S. Court of Appeals for the Seventh Circuit,
“U.S. v. Matthew R. Lange,” No. 00-‐1681 decided November 26, 2002, p. 7.
These trade secrets were related to the production of airplane parts; however, they would not have qualified for patent protection. RAPCO produces
aftermarket aircraft parts. This requires the purchase of original parts, the disassembly of these parts and precise measurements of each part. Through a series of experiments, RAPCO then determines the material compositions to achieve the correct process and product for the Federal Aviation Authority’s (FAA) standards. In this case, while the original parts were potentially patentable for the original innovator, RAPCO could not have obtained patent protection as they were not RAPCO’s innovation. Furthermore, copyright protection would be unlikely as the information was recordings of tests and not original, creative material. Thus, RAPCO had no other means of protecting the measurements and test data of the trade secrets.186 As Egbert (2003) notes:
In order to obtain approval from the FAA, completed assemblies must be exhaustively tested. For a complex part, this process typically required a year or two and considerable expense, in order to complete a design and obtain approval. The process of experimenting and testing can be avoided if the manufacturer demonstrates that its parts are identical (in
composition and manufacturing processes to parts that have already been certified.187
Thus, while the confidential information could not achieve copyright or patent protection, it would have been extremely valuable to RAPCO’s competitor by saving the expenses associated with achieving FAA certification. Trade secrecy, in this case, was a crucial means of IP protection and strategic management of business information for the manufacturing company.
Lange’s motivations appear to be a mixture of financial hubris and
disgruntlement. Described as a “disgruntled former employee,”188 Lange sought to benefit financially from the sale of his former employer’s trade secrets. His criminal culpability was fairly evident as the court showed that he had actually consulted an attorney, who advised against the attempted sale of the documents, before contacting a potential buyer. Lange committed further criminal offenses
186 The trade secrets also included some design drawings, which could have been protected by copyright, albeit only weakly.
187 Egbert, William (2003), “U.S. v. Lange: Conviction for Attempted Sale of Trade Secret Information,” Baker Bott LLP, published February 2003, available from
www.bakerbotts.com/infocenter/publications
188 Ibid.
by “feigning compliance while retaining an electronic copy” of the trade secrets and tried to persuade a friend to perjure himself on Lange’s behalf.189 This again represents a clear case of subjective intent where Lange was well aware of the legal status of his actions and sought to benefit from them nonetheless.
This case is again one where the potential buyer, a main competitor of the victim firm, reported the theft to the victim firm. Without this cooperation, RAPCO may not have uncovered the theft. Lange was convicted and sentenced to 30 months imprisonment and ordered to turn over all of the stolen trade secrets.
Furthermore, Lange was also convicted of copyright infringement, which is related to his attempt to sell a pirated copy of AutoCAD, a computer assisted design software, as part of his trade secrets bundle. The case demonstrates the vulnerability that manufacturers have to the potential loss of strategic trade secrets via employees.