Globalization and Digitization Usher In a New Era of Intellectual Property Theft

Synopsis

Intellectual property theft is trending the wrong way. Despite measures to prevent it, respond to it, and mitigate the effects of this type of costly and even dangerous crime, intellectual property theft is growing—all over the world. Globalization, in fact, is often the root of the problem.

Human Costs

The human costs associated with intellectual property theft are on the rise. People are losing jobs and companies are losing profits, but lives are put in danger not just from things like counterfeit drugs and counterfeit consumer goods, but from the spread of gangs, organized crime groups, and terrorist organizations. All of these groups are benefiting from the manufacturing of counterfeit drugs, piracy of music and movies, and theft of trade and state secrets. Some observers even say there may be a cost in personal freedom, as freedom of speech and the media are pitted against the rights of companies to keep their secrets and not have the secrets aired when they are leaked as a result of an intellectual property crime.

Counterfeit Drugs

The World Health Organization recently warned that as much as half of the world’s drug supply may soon consist of fake pharmaceutical drugs. Counterfeiting of drugs, in fact, could soon be one of the world’s fastest-growing industries. Profits in the counterfeit drug “industry” are estimated to have doubled since 2005. These counterfeit drugs often have useless, non-therapeutic ingredients or even contain dangerous and poisonous ingredients. They are almost always sub-potent. Hundreds of thousands of deaths have been caused by fake pharmaceuticals around the world. Fortunately, in the United States, thanks to better regulations and the efforts of skilled and dedicated law enforcement officers, only a small handful have died.

Counterfeit drugs are overwhelmingly manufactured in India, where the government is now cracking down on the manufacturing of counterfeit drugs and lawmakers are enacting stiff new criminal penalties. One recent report recently stated that the profits from the sale of counterfeit drugs are now eclipsing the profits being made from the sale of heroin and cocaine, attracting the involvement of organized crime and terrorists seeking income to fund other criminal activities. Moreover, there are fears that the growing expertise of counterfeiters combined with the involvement of criminals and terrorists could result in threats to national security from the use of poisons or biological products. The Russian mafia, Colombian drug cartels, Chinese triads, and Mexican gangs have all been implicated in producing and trafficking in counterfeit drugs, as has Al Qaeda, according to one report.

Piracy

Piracy of recorded creative works—among them movies, music, and software—is also on the rise. One authoritative anti-piracy website recently warned that the rampant spread of the piracy of music had put sales in this industry into a ten-year “death spiral,” where profits by legitimate companies would be virtually eliminated in a decade. Already, sales of legitimate CDs have dropped 70 percent over the last ten years. Jobs are lost as profits decline and crime increases as the sale of pirated products attracts the interest of criminals. Measures taken to respond to piracy can inconvenience the consumer. According to one newspaper report DVDs are frequently made with secure “padlocks.” These padlocks allow a DVD to be played on the players common to one global region only, so that a DVD can be played in one region of the world but not in another.

One anomaly to the damage caused by piracy recently took place in China, where the small Danish company that makes the “Angry Birds” game actually found a benefit in the widespread, illegal copying of the game, which has been downloaded 50 million times in that country. The company turned the widespread knowledge of its brand in China that resulted from the piracy into a marketing advantage for its other products in the country. Moreover, since consumers couldn’t tell the difference between the fake and genuine products, and sales of the game skyrocketed. In the United States, however, piracy of creative products can damage the brand of the original manufacturer when consumers can’t tell the difference between a counterfeited product, which may be shoddy, and the genuine article. Cheapening of the brand can be a serious problem, especially as reputations are hard to recover when lost.

Economic Espionage

Intellectual property theft also threatens major corporations, which hold trade secrets that could benefit their competitors and foreign governments. Intellectual content may often be more valuable to a company than its physical assets, but more than 45 percent of all U.S. businesses have reported losses due to intellectual property theft. This threat has increased dramatically over the last ten years with the digitization of entire sectors of the economy. The theft of digital information was recently estimated to cost companies a staggering $250 billion a year. Cyber criminals are more sophisticated than ever, and secrets can be downloaded directly to external sites, removed on a minuscule thumb drive, or exported by email. The military is a prime target of cyber criminals, and the use of contractors may make military and defense organizations especially vulnerable if their own security is old or inefficient. Foreign partners can also put industries at high risk of theft of their secrets if the partners operate in countries where digital security is lax. Economic espionage is a major problem in the United States and abroad. In Norway, a recent, concerted attack damaged the country’s energy and defense industries, also putting its foreign partners at risk.

Corporations, the military, and defense contractors are responding to the threat from cyber hackers after their secrets with increased security measures, which may reduce threats but which may also raise their costs. Many are turning to fingerprint scanners and voice and visual recognition devices to ward off the threat. These devices are expensive to develop and use. Some organizations are responding to the threat of intellectual property theft with “white lists” of safe software that its digital systems will recognize. Those software products not on the white list are refused entry into the organization’s data. The counterfeiting of software products is also a problem, as inexact copies may result in serious hazards, including the loss of important data and identity theft. The spread of personal devices such as Web-based TVs and smart phones can also pose problems, as they may contain only weak security programs.

Globalization: China

Unfortunately, much of the world’s problem with intellectual property theft can be traced to one country: China. Eighty-five percent of the counterfeit goods seized in the European Union in 2010 were believed to come from China. In the United States, the 14,841 seizures of counterfeit goods and unlicensed knockoffs had a domestic value of more than $260 million and accounted for 76 percent of all counterfeit goods. Almost 8 percent of China’s gross domestic product comes from the counterfeiting of creative works, consumer goods and industrial products, and software.

One recent newspaper report recently disputed the common belief that counterfeit products are turned out by small-time counterfeiters who “reverse engineer” products developed and manufactured in the United States. Rather, the report said, “sophisticated counterfeiters go straight to the source and steal design files and software code from the manufacturer.”

The production of knockoff goods, including not just consumer goods like electronics, luxury fashions, and toys, but also industrial products like airplane and automobile parts is a huge business in China, resulting in unfair competition for American companies. The problem is so serious that the U.S. International Trade Commission recently banned the import of steel train wheels made by one Chinese company when it determined that the company had used stolen U.S. trade secrets to produce the wheels. China’s booming, under-regulated economy helps breed counterfeiting. However, the Chinese government is also at fault; one observer said “stringent protection of foreigners’ intellectually property is at odds with China’s development strategy. Foreign companies operating in China complain that Beijing views the appropriation of foreign innovations as part of a policy mix aimed at developing domestic technology” and production. A newspaper report said, “The harder Beijing pushes its companies and scientists to come up with new ideas, the more they seem to copy the work of others.”

The Debate in America

In the United States, a titanic battle has erupted between the advocates of free speech and media freedom and the holders of copyrights, patents, and trade secrets. Bills recently introduced in Congress to limit the damage to these products by prohibiting Internet reports that discuss the secrets, once they are revealed, are leading to pitched battles over the freedom of speech. Stay tuned.