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Shadows & Trolls: Industrial Espionage, Intellectual Property and International Litigation

Friday, May 13th, 2011

At intellectualventures.com, one can find a copy of the complaint filed by Intellectual Ventures against, among others, Hynix Semiconductor of Korea. Intellectual Ventures, based in Bellevue, Washington, seeks jury trials and unspecified damages in three lawsuits, according to papers filed in federal court in Wilmington, Delaware.

The firm’s founder and chief executive officer is Nathan Myrhvold, the former chief technology officer of Microsoft Corporation. Since its founding in 2000, “Intellectual Ventures has purchased more than 30,000 patents” and “earned nearly $2 billion by licensing these patents,” according to court papers.

Separately, South Korean police are investigating possible industrial espionage after notification by the Indonesian government that intruders were discovered in its delegate’s Seoul hotel room. It is suspected that several officers from South Korea’s National Intelligence Service broke into the Indonesian delegation’s suite at the Lotte Hotel in Seoul. Two men and one woman are accused of looking at a delegate’s laptop computer and attempting to download information to a USB memory stick. Apparently, they were disturbed by a returning delegate. Some South Korean media report that the computer belonged to an aide of Indonesian Economic Minister Hatta Rajasa. It’s alleged that the three people were attempting to access data related to the potential sale by South Korea of its indigenous T-50 Golden Eagle jet trainer.

As reported by the Chosun Ilbo, a major Korean newspaper, the National Intelligence Service (NIS) agents who broke into a hotel room of a visiting high-level Indonesian delegation were operatives based with the agency’s industrial espionage team, according to a government official. He said the team is responsible for preventing domestic industrial secrets from being leaked overseas and gathering information both at home and abroad that is deemed sensitive to national security.

The NIS overhauled its organizational structure in the fall of 2009 and transferred agents in charge of spying on North Korea to gathering sensitive industrial and scientific information and other special operations. The role of the industrial espionage team was bolstered because Korea was increasingly becoming a target of corporate espionage as a growing number of Korean businesses acquired cutting-edge mobile phone and semiconductor technology. But the NIS is facing mounting criticism from government officials because talks with the Indonesians about the sale of weapons were going well, with the visiting officials asking Korea in a meeting with President Lee Myung-bak to serve as a major partner in the Southeast Asian country’s economic development plans. Critics say there was therefore no reason for the NIS to intervene.

Export of the T-50 Golden Eagle supersonic trainer jet has been a long-cherished dream of the Korean government. Developed by Korea Aerospace Industries in collaboration with Lockheed Martin over a 10 year period starting in 1997 at a cost of W2.8 trillion, the T-50 is the country’s first supersonic trainer jet and is equipped with top-notch electronics equipment. These features had stoked hopes of exports reaching around 1,000 units. The Air Force bought 90, but that was not enough to recoup the investment, making export crucial. The problem is the high price tag of US$25 million per jet. Although the T-50 boasts superior performance to Italy’s Aermacchi M-346 Master trainer jet, the Korean plane has lost to its Italian rival on several bids due to the high price.

When he was president-elect in January 2008, Lee asked the ruler of Abu Dhabi to buy T-50s but was unsuccessful. Lee then pitched the T-50 to Poland during his visit to Warsaw in 2009 and failed as well. Last year, he wooed Singapore by inviting the country’s leader to the G20 Summit, but failed again. He then set his sights on Indonesia. Lee pushed ahead with a visit to Bali because rejecting an invitation from Indonesian President Susilo Bambang Yudhoyono could have hurt the potential sale of the T-50 and other bilateral pacts. The two leaders there forged a defense industry cooperation pact that led to the visit of a high-level delegation to Seoul last week. Perhaps that deal would have been signed if it were not for this botched attempt at espionage. The NIS director has come under pressure to step down following the reports. No comment has come from the Indonesian Embassy here except to say that they asked the Korean side to look into the case. While commenting about the level of agents working for the NIS, one Western diplomat pointed out that it is not the first time a Korean agent was caught with his hands in the cookie jar, referring to last year’s incident in Libya, in which an NIS agent was caught by Libyan authorities while gathering intelligence.

One thing that is interesting about these two stories is the differing approaches to offensive tactics in a world of sensitive information, technology and potentially large financial gains. Here in Korea, the NIS has been tasked with a leading role not only in counter-measures and defenses, but also (apparently) in offensive efforts at gathering sensitive industrial information helpful to Korea, Inc. Typically, one would expect that the private sector would bear the brunt of such efforts, and that the international legal regimes in intellectual property protections and litigation would be the primary tools for such work, as well as sufficient pay and incentives, and effective risk management systems at the corporations themselves.

Patent trolls such as Intellectual Ventures understand this system and work it very well, as evidenced by the suits against Hynix and others. With regard to defense, to the extent that Korean industrial concerns are unable to defend against such suits, and end up paying license fees in settlement, they’ve failed in what’s really part and parcel of the high technology, high stakes game that is today’s global economic system, where information and technologies are increasingly valuable, and simple “hard work” and cheap labor don’t suffice.

Intellectual Ventures is also active in Korea, and at one point, the NIS reviewed their activities as well, as it was argued that the optioning of Korean technologies (via contracts with the various research institutes and universities in Korea, whose activities are largely state-funded) could constitute a national security threat. I thought that argument was weak then, and can see now that the use of blunt instruments such as the NIS in protecting (or indeed, augmenting) Korea’s intellectual property base may ultimately prove ineffective and potentially counter-productive.

What’s needed, therefore, is a much more sophisticated approach to industrial espionage, intellectual property and international litigation, where industry plays a larger role, supplemented perhaps by assistance at the national level. Dependence, however, on a state-run organization with limited capabilities and capacities is clearly not working.

After all, the fact is that sensitive information, even if adequately protected by law and security, is more often sold by underpaid insiders than it is stolen by the cloak and dagger method.

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