CHAPTER 3 THE THEFT OF TRADE SECRETS: EVIDENCE FROM THE
3.9.2 Cluster 2: Potentially Patentable Trade Secrets in Manufacturing and Construction .110
These next two cases occur in the manufacturing sector with one case being Coca-‐Cola, a foodstuffs manufacturer, and the other a chemical manufacturer.
150 Declaration of Joshua Pickus, Document 9 in Niku vs. Business Enterprise, 3:02-‐cv-‐03866-‐
MHP filed 12/08/2002 in N.D. CA., p. 6.
151 Kerstetter, Jim (August 23, 2002), “You’re Only as Good as Your Password,” Business Week.
The formulas and designs for the trade secrets in question were potentially patentable, but the firms chose instead to use trade secrecy.
Coca-‐Cola: U.S. v Williams, Dimson and Duhaney152
A discussion on trade secrets would be incomplete without the inclusion of the Coca-‐cola secret formula. Williams, a 42-‐year-‐old disgruntled secretary at Coca-‐
cola, stole confidential documents and product prototypes from her employer.
Through the assistance of two friends, Dimson, aged 30, and Duhaney, aged 43, Williams attempted to sell the trade secrets to Pepsi, Coca-‐cola’s largest rival.
Dimson posed as a Coca-‐cola executive and offered Pepsi “information that’s all Classified and extremely confidential … I can even provide actual products and packaging of certain products…”153 Pepsi-‐cola reported the offer to Coca-‐cola and the trio was implicated in an FBI sting operation.
The defendants’ motivations were a combination of financial incentives and disgruntlement. Williams is quoted as telling her co-‐defendants that she was angry with Coca-‐cola because she was “not treated right.”154 She was also aware that she had signed confidentiality agreements with Coco-‐cola. Williams also had two previous convictions, including one “involving making false statements related to unemployment insurance.”155 Her co-‐defendants had both been incarcerated at the same Alabama federal prison. Money was likely the
overriding incentive for this crime as the defendants collectively sought to gain over $1.5 million.
Williams’s theft of the secrets was fairly straightforward as she downloaded the secrets, which consisted of confidential information on Coca-‐cola’s marketing campaign, onto a USB drive. These secrets were likely only protectable via trade secrecy. However, Williams also stole samples of new, unreleased Coca-‐cola
152 USA v. Williams et al, 1:06-‐cr-‐00313-‐JOF-‐GGB-‐3, filed 11/07/2006 in N.D. Atlanta.
153 United States Attorney David E. Nahmias, US DOJ press release (October 23, 2006) “Two Defendants Plead Guilty in Coca-‐Cola Trade Secrets Case” available from
www.usdoj.gov/usao/gan/
154 Appeal Document No. 07-‐12653 in the U.S. Court of Appeals for the Eleventh Circuit, filed in U.S. v. Joya Williams 1:06-‐cr-‐00313-‐JOF-‐GGB-‐3, filed 11/07/2006 in N.D. Atlanta, p. 3.
155 Weber, Harry P. (2007), “Ex-‐Coke Secretary gets 8 years in prison”, Associated Press, published in USA Today, 23/05/2007.
products. Like the famous Coca-‐cola secret formula, these product samples had the potential for patentability, as their chemical makeup is patentable subject matter. However, like the secret formula, Coca-‐cola had chosen to use trade secrecy to protect this strategically important knowledge. Details on how the files and product samples were protected through technical measures were not available; however, Williams had signed confidentiality agreements. A Google Patent search reveals that Coca-‐cola has over 420 granted patents156 and pending applications including some chemical foodstuffs.157 Thus, the lack of patent protection for this product sample likely represents a deliberate decision not to patent the new product during its R&D phase.
The discovery of the theft came about when Pepsi reported Dimson’s attempted sale to Coca-‐Cola. Pepsi’s motivations in reporting the theft may have been altruistic or fear of the potential liability associated with the involvement in a criminal act. Nonetheless, Pepsi’s actions alerted Coca-‐cola to a theft that might otherwise have gone unnoticed. The FBI sting lasted roughly a month as an FBI agent posing as a Pepsi representative negotiated with the trio for initial
payments of approximately $50,000 and final payments of $1.5 million for the documents and samples. Throughout these negotiations, Williams was recorded at work taking further documents and samples. As all three defendants had previous convictions, the sentencing periods were longer than if the defendants had been first-‐time offenders. Williams was sentenced to 96 months of
incarceration in addition to community service.
Plastics: U.S. v Kim158
Kim, a South-‐Korean immigrant to the US, was convicted in 2008 of stealing trade secrets from his employer over a period of seven years. Dr. Kim, a 63-‐year-‐
old with a PhD in Physics, was a Senior Research and Development Officer at
156 Google Patents, www.google.com/patents performed May 12, 2010, search term “inassignee:
Coca-‐Cola”
157 As an example, Coca-‐cola has 13 patents and applications in U.S. Patent Class 426/74, Product with Added Plural Inorganic Material or Element Fortification, Google Patents, Google Patents, www.google.com/patents performed May 12, 2010, search term “uspclass:426/75 inassignee:
Coca-‐Cola”.
158 USA v. Kim, 1:08-‐cr-‐00139-‐SO-‐1, filed 26/03/2008 in N.D. OH.
Lubrizol, a specialty chemicals company with annual sales of $4.5 billion. Three executives at SK Chemicals, a competitor company located in South Korea, paid Kim $10,000 per meeting for a series of 17 separate meetings lasting several days each in which Kim provided them with information and files related to confidential Lubrizol technology. The theft was discovered in 2007 when Lubrizol noticed “a huge advance in the development of SK Chemicals’
thermoplastic polyurethane product…. At the same time, Lubrizol learned from an employee in South Korea that SK had someone on the inside.”159
Few details are available on the trade secrets themselves as the indictment document has not been made publically available. This could be because the indictment contains revelations about the trade secrecy that would expose the trade secrets. However, the DOJ press release describes the trade secrets as
“trade secrets regarding Thermoplastic Polyurethane and other confidential Lubrizol technology; this included Non-‐Halogen Flame Retardant Technology sold under the Estane trade name … and static control technology...”160 Kim provided the SK Chemicals executives with files, handwritten faxes and
discussions during the meetings. Collectively, this suggests that the trade secrets were linked to technology related to chemical products that is potentially
patentable. Lubrizol is an active patenting entity as a Google Patent161 search revealed over 500 applications and granted patents where Lubrizol is listed as the sole assignee. Additionally, two applications and one granted patent
specifically refer to trademarked brand Estane, one of the technologies included in Kim’s theft. Thus, this case provides evidence that Lubrizol uses a strategic combination of patents, trademarks and trade secrecy to protect its innovations.
Another element of this case that provides insight into the use of technology is the extent of the internal investigation into Kim’s actions. In a court document, Lubrizol provides a copy of some of the invoices from the $29,000 bill from the
159 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
160 DOJ, N.D. OH (November 12, 2008) “Trade Secrets Charges Against Company Executives and South Korean Nationals”.
161 Conducted May 12, 2010 on google.com/patents using the search term “inassignee: Lubrizol”.
private investigators hired to look into the theft.162 The invoices detail the actions taken to uncover Kim’s trail and include extension computer searching, interviews, file signature analysis, reading of personal e-‐mails and background checks. The invoices demonstrate that the average hour of contracted
investigation cost Lubrizol $250 in addition to internal costs incurred. While Kim’s theft was unusual in that it occurred over several years and was thus potentially more difficult to investigate, the direct cost to Lubrizol demonstrates the financial burden which victims face.
Extensive details are available on the motivations of Kim in committing this crime. Kim’s Sentencing Memorandum details his life as an immigrant and how he had worked his way up from pushcart seller to a PhD in Physics. His defence team sought leniency in sentencing by arguing, “he was driven to commit the charged offenses not merely out of greed, but out of a deep feeling of failure.”163 Kim cited his lack of advancement within the company and a divorce as being the source of this sense of failure. Kim’s extensive connections in South Korea may also have led to split loyalties and the court documents suggests that some disgruntlement, due to not being addressed as “Dr.” at work, were also contributing motivations. Nonetheless, Kim benefited financially from the
$170,000 he received for the sale of Lubrizol’s trade secrets. At the conclusion of the case, Kim cited “ignorance” as the reason he agreed to spy.164
Kim was sentenced to 19 months imprisonment and ordered to pay $188,700 in restitution to Lubrizol. As a letter from Lubrizol states, “Mr. Kim’s criminal conduct harmed Lubrizol. While Lubrizol has not attempted specifically to quantify the total financial loss for restitution purposes, the amounts involved
162 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.
163 Defendant’s Sentencing Memorandum, dated November 17, 2008, Document 16 in USA v. Kim, p. 3.
164 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
are far in excess of what Mr. Kim could hope to repay.”165 Given this reality, the prosecution of Kim is an example of the use of the EEA against an otherwise judgment-‐proof defendant.
An unusual conclusion to this case is that in October 2008, seven months after Kim was indicted, Lubrizol bought SK Chemical’s thermoplastic polyurethane business for $5 million.166 A news report at the time indicates that this portion of SK Chemical’s business had annual sales of $30 million.167 As no civil litigation was uncovered in this research, it is possible that Lubrizol chose not to sue and instead “probably managed to negotiate a good price with SK.”168 With this purchase, Lubrizol gained “equipment, technology, customer lists and manufacturing know-‐how”,169 in addition to containing the leak of its trade secrets. The fact that the theft had been on-‐going for seven years indicates that SK Chemical’s unfair competitive advantage arising from the theft and the associated civil liability was likely to be very large. It is possible that a civil settlement and/or injunction would have made SK Chemical’s thermoplastic polyurethane business unit untenable. Lubrizol’s decision to purchase the business unit appears to be a shrewd business move that avoided the costs of litigation. No other EEA cases have been uncovered in which the victim company purchased the beneficiary of the trade secrets theft. Thus, the Lubrizol
represents a novel business resolution to the theft of trade secrets.