5 Ways Electronics OEMs Can Combat the IP Theft Challenge

Theft of intellectual property is a growing problem, particularly in the electronics industry. Awareness of the problem and strategic action, though, can help manufacturers get a handle on the problem.

In 2013, the Commission on the Theft of American Intellectual Property delivered a report on IP theft which concluded that “the scale of international theft of American intellectual property (IP) is unprecedented—hundreds of billions of dollars per year, on the order of the size of U.S. exports to Asia.  The effects of this theft are twofold.  The first is the tremendous loss of revenue and reward for those who made the inventions or who have purchased licenses to provide goods and services based on them, as well as of the jobs associated with those losses.”

The report went on to say that companies of all sizes were affected by this theft, which was “undermining both the means and the incentive for entrepreneurs to innovate, which will slow the development of new inventions and industries that can further expand the world economy and continue to raise the prosperity and quality of life for everyone.”

Electronics companies and innovators are among those most frequently victimized. We have only to look at the FBI’s 2016 case files to see this.

In May,2016, an Arkansas man pleaded guilty to selling counterfeit Garmin maps over the Internet, thereby infringing copyright. He sold at least 874 counterfeit map products for more than $23,000. The products were valued at more than $67,000.

In January 2016,  a Los Angeles area electrical engineer was convicted of 32 counts of violating the Economic Espionage Act. He stole trade secrets from his former employer – a Pasadena-based aircraft avionics company – and distributed the proprietary material to three competitors. The information the engineer sold contained enough supporting documentation to enable the competitors to reverse engineer products.

In November 2016, Xianfeng Zuo of Shenzhen, China, was sentenced to 15 months in prison for conspiring to sell counterfeits of sophisticated integrated circuits to a purchaser in the United States. Operating a China-based business that sold integrated circuits, Zuo wanted to purchase several advanced ICs made by Xilinx Corp. that were used in military applications. When he learned that these circuits could not be shipped outside of the U.S., he proposed to substitute them with counterfeit circuits from his Chinese company to affect the theft of the Xilinx circuits from military inventory.

These recent cases point to three vulnerability points for IP that confront electronics companies:

  • Market risks occur when consumer products are counterfeited and sold for less than what they are worth;
  • Longer-term product development risks develop when employees and/or contractors steal product documentation and sell it to competitors, who get the products without having to invest the R&D effort themselves; and
  • Supply chain safety and liability risks emerge when electronics companies (and others) inadvertently use counterfeit components in end products that could subject them to liability later (e.g., counterfeit circuits and components in commercial and/or military jets that malfunction because they are not the “real” parts).

However, at the other end of the spectrum, electronics companies are concerned about excess legal actions in patent infringement challenges that they believe are becoming burdensome to product development and commercialization—and costly to companies, which can spend as much as two or three million dollars in litigation for each patent infringement allegation. The practice is known as patent trolling, when a person or company attempts to enforce patent rights against accused infringers that are far beyond the patent’s actual value or contribution. The concern is that many of these patent trolling actions are frivolous, and that the U.S. Patent Office should step in to curtail some of this activity.

Michelle Lee, director of the U.S. Patent and Trademark Office, spoke to the matter at the 2016 Consumer Electronics Show (CES).“It’s that balance that we’re working with Congress and stakeholders to achieve in patent litigation reform,” said Lee.

Clearly, electronics companies, like the U.S. Patent Office, must find a balance between the need to defend their intellectual property and an equal need to avoid patent infringement challenges that are frivolous and costly.

Here are five strategies electronics OEMs can use to maintain this balance:

  1. Play an active role in discussions and forums with the U.S. Patent Office and other regularity agencies in patent trolling/frivolous infringement discussions.
  2. Carefully vet every tier of your supply chain’s suppliers, identifying “risk points” for the intrusion of counterfeit parts into your products.
  3. Perform IP due diligence on every potential business partner before inking an agreement with them.
  4. Vet employees and contractors who have or will have access to intellectual property. Theft of IP by internal employees is one of the most common ways to lose IP protection. In other cases, employees are careless when they collaborate with business partners and co-manufacturers, and they inadvertently share IP.
  5. Review your business processes to ensure that they have appropriate IP protection built into them. It is common for universities, companies, and consultants to collaborate from geographical locations around the world on new product designs and manufacture. Global access to the best minds bodes well for innovative product development and manufacture, but it also carries its share of IP loss risks. Your cyber networks should be secure, access to IP documentation should be defined down to the level of each individual. Network software should continually monitor user data access and usage patterns and issue an immediate alert if a usage or access anomaly suddenly occurs.

Electronics companies of all sizes need to think about these issues. Let us know in the comments section below what strategies your organization uses.

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