From: "Vladimir Z. Nuri" <vznuri@netcom.com>
Date: Wed, 9 Sep 1998 10:31:56 +0800
To: cypherpunks@cyberpass.net
Subject: IP: Industrial Espionage Increases as Firms Seek Competitive Edge
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From: Richard Sampson <rjsa@sprintmail.com>
Subject: IP: Industrial Espionage Increases as Firms Seek Competitive Edge
Date: Tue, 08 Sep 1998 12:52:43 -0400
To: "ignition-point@majordomo.pobox.com" <ignition-point@majordomo.pobox.com>

 Industrial Espionage Increases as Firms Seek Competitive Edge
Sep. 6 (The Record/KRTBN)--The place: the Four Seasons Hotel,
Philadelphia. The date: June 14, 1997.

On one side of the table, two men from a Taiwanese company hoping to
expand into biotechnology. On the other, an FBI agent posing as an
information broker, and a researcher from Princeton-based Bristol-Myers
Squibb posing as a corrupt scientist preparing to sell a piece of his
company's soul.

On the table: a sheaf of papers -- stamped "confidential" in big,
black letters -- representing the company's investment of hundreds of
millions of dollars in Taxol, the blockbuster anti-cancer drug. The
asking price, according to the FBI: $200,000 and a percentage of sales.

The drama played out in that hotel room -- which ended when additional
FBI agents burst through the door and arrested the Taiwanese -- marked
the first federal sting operation against alleged spies for a foreign
corporation.

But industrial espionage today is far from unusual. U.S. companies are
increasingly being looted of some of their most precious technical
secrets by competitors -- both foreign and domestic -- using legal and
illegal methods. And New Jersey's research labs and high-tech companies
-- particularly pharmaceutical companies -- are prime targets.

>From 1992 to 1996, according to one study, the number of  cases of
industrial espionage at the nation's 1,300 largest companies nearly
doubled to about 1,100.  The potential commercial value of the stolen
information was pegged at $300 billion.

Richard Heffernan, a Branford, Conn., consultant who conducted the
study for the American Society of Industrial Security of Alexandria,
Va., said New Jersey pharmaceutical companies -- including Merck & Co.,
Schering-Plough, Warner-Lambert, and Johnson & Johnson -- have all been
targeted by corporate spies.

The reason: the hundreds of new products in their research and
development pipelines -- products that require huge investments in time
and money. Those pipelines hold the potential for billions of dollars
in profits.

"New Jersey is one of the top 10 areas for corporate espionage," said
Heffernan, who has advised a number of New Jersey drug companies on
ways to protect their secrets. "This is not a new thing for
pharmaceutical companies, and it's become progressively worse. There's
so much money to be made from the theft of their information. That
pipeline is a very deep, rich vein of gold."

In addition to illegal intrusions -- which can include anything from
hacking into a private computer to buying trade secrets from a company
insider -- more companies are targeting competitors' secrets using
legal -- but in some cases, unethical, or highly intrusive -- methods.

Membership in the Society of Competitive Intelligence Professionals --
an Alexandria, Va., group that advocates the use of legal methods to
gather business intelligence on competitors -- has skyrocketed in
recent years, more than quadrupling since 1990.

For the most part, competitive intelligence professionals analyze data
from public sources -- news reports, databases, trade shows, and the
like. But they also tap more questionable sources, such as satellite
photos. And they have indicated a widespread willingness to step over
ethical lines to obtain information on business rivals.

In a survey published in April by the competitive intelligence group,
participants -- all corporate spies -- were given several scenarios and
asked to choose from various options on how to proceed. Nearly half
said they were willing to misrepresent the purpose of their research,
30 percent were prepared to read a marketing report left on an adjacent
airplane seat, more than 70 percent said it was permissible to pump a
new hire for confidential information about her previous employer, and
20 percent were willing to read and use a competitor's proprietary
product data.

All of those tactics violate the competitive intelligence group's own
code of ethics, and the last might step over legal lines as well,
according to the survey's authors.

"I think there is room for some very legitimate information gathering
that's important for companies to do," said Gayle Porter, an authority
on business ethics at Rutgers University. "But I think there are
probably many, many, many examples of people taking it too far."

In New Jersey, there are abundant examples of companies alleging that
they have been targets of industrial espionage -- or who have been
accused of targeting others.

In 1996, Boehringer Mannheim Corp., a German drug company competing
against New Brunswick-based Johnson & Johnson in the $1.75 billion
market for blood-monitoring devices, sued J&J and its LifeScan
subsidiary in federal court.

Boehringer alleged that LifeScan offered employees incentives for
spying on its archrival, and that LifeScan employees sneaked into
Boehringer sales meetings in Indiana, Florida, Turkey, and Germany to
obtain proprietary product information. J&J denied the charges and in a
countersuit said Boehringer hired detectives to obtain secrets and had
workers pose as customers.

Boehringer acknowledged some of J&J's charges, including that it had
reprimanded an executive for posing as an importer to obtain a
demonstration of a product not yet on the market, and that it had
maintained a "competitive kill team" targeted at LifeScan.

But the two companies reached an out-of-court settlement in 1997,
agreeing to keep the terms of the settlement secret. J&J spokesman
Jeffrey Leebaw declined to comment. Boehringer did not return calls.

Heffernan and others say industrial espionage is on the rise because
of tougher competition in domestic markets, the targeting of U.S. trade
secrets by foreign economic and industrial interests, and the
combination of computer hackers with increasing technical
sophistication and companies that are woefully unprepared to stop them.

And they say one of the times companies become vulnerable is when
high-level employees leave.

Executives with knowledge of marketing plans for new products and
researchers responsible for developing the next big scientific
breakthrough are often exploited by their new employers to obtain a
competitive edge.

That is what Warner-Lambert of Morris Plains charged in a 1997 lawsuit
that was subsequently dropped.

The company spent 12 years and $17 million developing Procan SR, a
sustained-release drug used to treat heart rhythm irregularities. The
product won Food and Drug Administration approval in 1982.

Warner-Lambert accused a former employee of giving the top-secret
formulas for the drug to Copley Pharmaceutical Inc., a Canton, Mass.,
generic drug manufacturer she went to work for in 1984. Seven months
after she joined the company, Copley asked the FDA to approve a generic
version of the drug, which Copley eventually brought to market.

Neither company would comment on the settlement that ended the matter,
but Jason Ford, a Warner-Lambert spokesman, said the drug -- which was
discontinued several years ago by the company -- was never a
blockbuster.

"It wasn't so much the stealing of the product," Ford said. "The main
reason why we filed the lawsuit was to make it clear that we vigorously
defend our intellectual property. It sends a loud and clear message
that this is something we take very seriously."

Another North Jersey company, the Wormser Corp. of Englewood Cliffs,
also played a key role in an industrial espionage case involving a
former employee -- not as the victim, but as the accused.

The case centered on Frederick Marks III, a production manager
employed by Powell Products Inc. of Colorado Springs, Colo., until
1993. According to a lawsuit filed by Powell in 1995, Marks took with
him top-secret blueprints for a machine developed by Powell  to
mass-produce foam-tipped swabs more quickly and cheaply than any other
machine then available.

Powell accused the Wormser Corp. of bankrolling a plan to use the
stolen blueprints to create a prototype of the Powell machine, and
using the machine to compete against Powell.

After two years of litigation, a Denver jury awarded Powell $2.7
million in damages and legal fees, but Powell settled with the Wormser
Corp. for $1.7 million. Marks pleaded guilty to misdemeanor theft in
February in exchange for his cooperation with the FBI. The Wormsers --
company president Stephen, and his sons, Alan and David -- have not
been charged.

David Wormser referred questions to Bill Meyer, a Boulder, Colo.,
lawyer who denied the allegations, saying the Wormsers settled with
Powell to avoid "years and years" of legal wrangling. Powell President
Stephen Robards said the Wormsers are the true culprits.

"There's no question about it," he said. "The blueprints Marks stole
would not have damaged us without the Wormsers' money. He didn't have
the resources to start a business without them."

Since the passage of the 1996 Economic Espionage Act (EEA) making the
theft of trade secrets a felony, the FBI has become more involved in
industrial espionage cases in which U.S. companies have been targeted
by foreign or domestic interests.

To date, five cases have been brought under the act, including one in
July in which a Piscataway man -- a former scientist for Roche
Diagnostics, a Branchburg division of Nutley-based Hoffmann-La Roche --
was charged with attempted theft of trade secrets from the company.
According to the complaint, Huang Dao Pei tried to obtain secrets from
a current Roche scientist about the company's hepatitis C diagnostic
kit, hoping to market a similar kit in China.

William Megary, special agent in charge of the FBI's Newark office,
said individuals trying to steal American trade secrets are not "street
thugs," but high-tech thieves who are "educated, resourceful, and
elusive."

"Our cases illustrate the complexity of not only how diverse the
criminals are, but how diverse the crimes are, as well," he said. "The
FBI is committed to enforcing the EEA. Our message is clear -- it is no
longer open season on American technology."

Even before the act became law, federal stings were not unheard of.
 In the Bristol-Myers Squibb case, FBI agent John Hartmann established
himself as a technology information broker in 1995 and began laying a
paper trail of more than 135 faxes, e-mail messages, telephone calls,
and letters with the representatives of the Yuen Foong Paper Co., which
would eventually lead to the fateful meeting at the Philadelphia hotel.

Jane Kramer, a spokeswoman for Bristol-Myers Squibb, said the company
uses "the most sophisticated techniques" for safeguarding its trade
secrets, but she would not elaborate. When security is breached, she
added, it is important for a company to fight the intruder with every
weapon in its arsenal.

"Taxol is a major advance in cancer treatment," she said, adding that
the company's multimillion-dollar investment in research on the drug is
more than repaid by its $1 billion in annual sales. "You have a
dramatic investment in research and development that's the lifeblood of
a company like ours. The ramifications are huge for our present and our
future."

In what authorities described as the largest industrial espionage case
in U.S. history, a 1990 FBI sting led to charges against two men for
stealing secrets valued at $1 billion from Merck & Co. in Whitehouse
Station and Schering-Plough Corp. in Madison.

Biochemist Bernard Mayles, a former employee of the two companies, and
a confederate, Mario Miscio, were ultimately convicted of trying to
sell the secret formulas for Ivermectin, an anti-parasitic drug
marketed by Merck, and Interferon, a cancer and hepatitis treatment
sold by Schering-Plough.

An FBI agent posing as a Chinese investor who wanted to convert an
idle factory for Ivermectin production agreed to pay $1.5 million for
the formula and the microorganism used to produce the drug. He promised
to arrange the sale of the Interferon formula to a Polish investor for
$10 million.

Schering-Plough spokesman Ronald Asinari declined to comment, but
Merck spokeswoman Maggie Beute said her company has taken additional
steps to safeguard secrets in recent years, including beefing up
computer security and being more vigilant about getting vendors to sign
confidentiality agreements.

"There's so much at stake here," she said. "Anything that shortens the
life of any of our products is going to have detrimental effects on our
ability to recoup our investment in R&D. As an industry, we're very
focused on making sure our intellectual property rights aren't
violated."

Illegal intrusions such as those against Merck, Schering-Plough, and
Bristol-Myers Squibb have created a cottage industry for consultants
who advise companies on how to keep their secrets safe.

Andy Welch, a senior consultant at KPMG Peat Marwick's risk-management
practice, said business has increased tenfold in two years. Two out of
three companies who come to him for help are taking preventive
measures, but the others have already suffered security breaches.

Welch examines personnel policies to make sure there are procedures
for deactivating computer passwords when employees leave. And he
attempts to hack into the company's system from the outside to find its
weak links, such as the ability to dial in to a company's computer
system without a password.

He said many companies are not prepared to deal with the threat of
corporate espionage, especially intrusions into their computer systems,
where many of their most valuable secrets reside.

"The indication is that there is a large degree of unpreparedness out
there," Welch said. "It needs to be taken seriously. I can't tell you
with a straight face that everything is warm and fuzzy out there."

By Louis Lavelle

-0-
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