Has the Cold War started again? Are there spies lurking in the shadows? The FBI recently set up a dragnet to catch people coming to America to steal secrets. But those who fell into their trap weren't Russian spies, but Taiwanese businessmen . . . . How does one begin to explain this?

In the middle of June, Chester Ho, a professor at National Chiao Tung University, and Hsu Kai-le, a technical consultant for Taiwan's Yuen Foong Yu Paper Company, were caught in a trap laid by the FBI and arrested. They were charged under the Economic Espionage Act (EEA) for intending to "steal" technical secrets regarding the anti-cancer drug Taxol, which is manufactured by Bristol-Meyers Squibb. News of the arrests immediately created a great stir in industry.

Following closely on these arrests, in late September Yang Pin-yen, the CEO of Four Pillars Enterprise and known as "the father of Taiwan tape," was also detained by the American authorities. Yang's daughter Yang Hwei-chen, who heads up research and development for Four Pillars, was also arrested. It is surely no accident that two Taiwan firms were charged with violating the same crime in similar undercover operations.

In early October, when charges were formally brought against Four Pillars, there were a startling array of charges, including economic espionage, money laundering, and mail and wire fraud. A conviction on economic espionage alone could bring a maximum sentence of ten years. Although the court case has just begun, it will have broad implications. In Taiwan, industry people are deeply alarmed and trying to learn how exactly they should respond to the EEA.

A new weapon in the trade wars

The US Economic Espionage Act is indeed very new. Congress passed it in October of last year, and it has only just passed its first anniversary.

Yet while the law is new, investigations have been being pursued for quite some time already. For instance, the FBI has been investigating Yuen Foong Yu for two years. Sources say that the FBI has several hundred economic espionage case files. With Taiwanese involved in two of the four cases in which charges have been filed (the other two involve American companies trying to steal trade secrets from other American companies), one fears that many of the remaining cases may involve Taiwanese as well.

Curiously, America has had trade secret laws for over 100 years that are very similar to the EEA in content. In addition, there are laws governing copyrights, trademarks and interstate trade theft that are constantly resulting in law suits. Can it be that these laws are not enough, and that a new law was needed bearing the term "espionage," with all its forbidding associations of enemy nations?

In early October, in a seminar put on by the Industrial Technology Department and Board of Foreign Trade within the Ministry of Economic Affairs, the American lawyer Sturgis Sobin described the background for the enactment of the EEA. He pointed out that the old trade secrets laws varied from state to state, and that in most states they were part of civil rather than criminal law, meaning that prison sentences weren't given. Trade secret laws weren't severe enough, the vigilance and economic resources of the states weren't adequate and the penalties were light. Thus it was difficult to attain the desired result of deterrence.

John Chiu, a Taiwan native who practices law in the US, points out that the EEA is special in putting such transgressions under "federal, criminal law."

Since it is federal law, the FBI can be used for investigations, and there won't be a problem of lacking financial resources and regrets about "fish slipping through the net." And in view of the tremendous amount of material resources and manpower used in the four investigations for which charges have been made, it appears as if the FBI plans to enforce the law aggressively.

The new economic warriors: FBI agents

In the past prosecutors would only pursue an intellectual property rights case when a complaint was filed, and companies whose rights were infringed had to hire their own investigators to uncover evidence. Evidence was difficult to collect, and about half of all cases resulted in the courts not finding the defendants in any way liable. But the EEA has turned these disputes into public matters, and now a firm catching a competitor taking its trade secrets can file a complaint with the FBI, which can use the federal government's resources to pursue the investigation. The FBI can also legally set up "stings" to raise the conviction rate in trade secret cases. It is tantamount to encouraging American firms to strike out foreign rivals that are threatening them. The sensationalistic term "espionage" was surely not lightly chosen. Some have suggested that in the wake of the cold war, the world is too peaceful, but the nation must have enemies. And in the process of passing the EEA, the US Justice Department stressed that "economic security" was a major part of national security, as important as military security. Furthermore, it estimates that foreign governments and companies have robbed American companies of more than US$100 billion in profits and many millions of lost jobs by stealing trade secrets. Productivity and national power are closely linked. This is a serious matter, and enforcing laws against espionage is proper.

A close look at the text of the law shows that two different kinds of crimes are described, of which the word "espionage" only appears in section 1831, which states that anyone who intends to steal or who has knowingly stolen trade secrets for the benefit of a foreign "government, agent or instrumentality" can face harsh punishment. Numerous different forms of behaviors are regarded as trade theft including burglary, fraud, and giving or receiving bribes, as well as unauthorized copying, taking notes on, or photocopying of trade secrets.

The second kind of crime, as stated in section 1832, describes "theft" of "trade secrets." The section does not use such terminology as "espionage" or "intent to benefit a foreign government," but describes rather typical interstate or international stealing of trade secrets. The penalties for such crimes are much lighter.

Nevertheless, John Chiu argues that putting such infractions under a law prosecuting "espionage" shows that America is targeting this law at foreign governments and foreign companies. This is what first raised the suspicions of people in the ROC. Fortunately, the Four Pillars and Yuen Foong cases are being prosecuted under section 1832, which concerns only the theft of trade secrets, and thus the controversy that would have ensued from charges of espionage was avoided.

Still a controversy

Fortunate as it may be that the Four Pillars and Yuen Foong Yu cases did not involve charges of espionage, the dark clouds put over Taiwan industry by the attentions of the US Justice Department have not yet passed. In the Yuen Foong Yu case, former employees of the Biotechnology Research Institute at Chiao Tung University and the Industrial Technology Research Institute were implicated, and it seems as if America wanted to raise the perceived level of involvement.

With this harsh new law, US government resolve to enforce it, and US firms that seem happy to use it against their competitors, Chengchih University Professor Lai Shih-pao says that the near-term result will be a "whirlwind." Whether one is speaking about high-technology items such as biotechnology and computers or traditional industries that are struggling to modernize, all run the risk of being knocked over in the storm. Many pending instances of technological cooperation, purchases of technology, and recruitment of skilled personnel could be put on hold.

Huang Chung-chiu, head of the Industrial Technology Office in the Ministry of Foreign Affairs, says that the EEA is a warning sign. Taiwan wants to move from being an "Asian manufacturing center" to becoming an "Asian technology research center" and enter the ranks of the global high-tech nations. It is going to be important for Taiwan firms to do this while staying within the letter of the law.

Wu Huei-mei, director of the National Bureau of Standards, frankly states that "Knowledge and treatment of intellectual property by people in Taiwan is still behind international levels." The "we can get away with it" attitude held by a minority of Taiwan firms will not change overnight, and it is feared that more EEA cases involving Taiwanese firms will be seen.

Who owns the consultant's knowledge

Four Pillars was accused of paying Ten Hong Lee, an overseas Chinese employee of the American firm Avery Dennison, to steal trade secrets for them. Hsu Te-cheng, head of the Taiwan Area Adhesive Tape Association, who worked under Yang Pin-yen, points out that over the past few years, as domestic Taiwan firms have met with setbacks in trying to raise the level of their technology, they have time and time again turned to foreign and domestic consultants to solve various problems on their behalf.

Some of these consultants have already retired, and others are still working. Many of them are overseas Chinese who are US nationals and who have worked for multinational companies for a decade or more. All have a few bits of secret knowledge in their bag of tricks. In the workplace in the US, they have all to some degree or another confronted the "glass ceiling" due to their ethnic background, which has left them resentful. When they return to Taiwan, they are regarded as great authorities by local industry, and this makes them feel good. Taiwan is a small place, and if someone isn't from your home town, he's liable to be an alumnus of the same school. It's easy to quickly find common ground.

Of course, hiring a consultant is not tantamount to intending to "steal trade secrets." In the vast majority of cases, the consultant and his client are both very prudent. In particular, part-time consultants who still earn salaries from American firms have no need to sell out their future for the sake of a small consulting fee. Nevertheless, Hsu Te-cheng points out that ROC nationals have always had a lax attitude about intellectual property rights, and as a result may fail to distinguish whether these consultants' advice comes from the perspective of personal ability, discussions of their experience, or knowledge of their present or former employers' secrets. It is very difficult to judge whether consultants are overstepping their bounds, and companies aren't in the habit of protecting themselves by keeping track of what their former employees are doing. The EEA controversy has suddenly made people realize that the role of the consultant must be more clearly delineated.

Taking the bullets but leaving the gun!

Since hiring a consultant might result in legal trouble, might not the practice of hiring away another firm's workers or enticing personnel to return home from jobs in the US be considered "stealing trade secrets" under section 1832 of the EEA? At the Ministry of Finance seminar a medical instruments company that is holding discussions to get eight PhDs to return from jobs in America is full of anxiety about whether it can go ahead with its plan to hire them.

From a legal standpoint, there are rules to follow in hiring people from a company in the same field. Like in America and Japan, in Taiwan there are "competitive firm prohibitions" regulations (for instance, someone can't work on something that was closely related to his previous work for over a year). But Robert Chen, General Counsel for Acer Computer, who has passed the bar in California, notes that in his six years at Acer, they have never enforced this prohibition. Although Acer has issued letters for certain employees, even intending to prevent them from taking their knowledge to competing firms or from setting up shop by themselves, in the end, based on Acer's corporate ideal of handling such matters "person to person" and their faith in the "innate goodness of human nature," they never pursued investigations.

Tien Wei-cheng, executive director at the Development Center for Biotechnology, notes that people in Taiwan believe that preventing people from changing firms in the same field is "inhumane." There is also an unwillingness to spend large amounts on research and development. Enticing the staff of competitors who "bring their guns with them," Taiwan companies use hiring as the direct approach to upgrading their technology. It is common industry practice, so that no one regards it as "theft" with the possibility of incurring serious punishment.

Liu Pi-chiang, a professor at the Graduate Institute of Technology and Innovation Management at Chengchih University, who has a deep understanding of the bad practices of industry, puts it in a nutshell: "Although their 'guns' are what these guys use to make a living, you've got to first understand whether their guns are their own or actually those of their former company. Sometimes, they've got good marksmanship, but they can only bring a few bullets with them; if their new boss wants the whole gun-sorry, he's going to have to pay for it."

The easy way out costs in the long run

In buying "guns," a company must seek to obtain rights for technology or enter into a joint venture. But the process of buying technology is extremely complicated. Among the issues to be discussed are a commission (usually 5% of gross sales), a minimum production figure, and the scope of rights transferred (for instance, the purchasing firm may only be able to produce a product for the Taiwan market). Such book-length contracts are enough to scare any firm without a lot of capital away from trying to negotiate buying technology rights from a major international firm.

"Technology isn't a good for sale," says Chen Song-po, an associate professor of business administration and information science at National Open University and formerly a high-ranking executive in the pharmaceutical industry. "To get it, money isn't necessarily enough." Chen points out that for hot, one-of-a-kind technologies like Taxol, there is almost no chance of buying rights. Even if the producer were willing to sell, the price would be far above what domestic firms could afford, or otherwise there would be a heap of restrictions so restraining as to make the deal unprofitable.

Chen bluntly describes Taiwan firms as being profit-hungry and rather presumptuous about their own intellectual abilities, confident that they can recreate a competitor's product so it's at least 70% or 80% right. "They do it like piecing together a jigsaw puzzle. The general outline is there; and just a few pieces are missing in the middle." Sometimes, a company will put together about 60% on their own before being stymied. At this point just giving up would make all their previous effort be for naught; yet lacking the capital and the willpower needed to reach 100%, they instead keep their ears perked for technical information about the product and try to hire away personnel from the original firm. Or else they buy inferior technology of uncertain origin from a technology broker. "If they can get it 80% right, so it's good enough to sell, then they're satisfied." And it's precisely this way of doing things on the cheap that sets the stage for unintended legal transgressions.

Don't cross the global big boys

To look at it from another angle, large multinational firms spend huge sums to proceed with research, and naturally they don't want other people to reap the financial rewards. But it is easy to imagine that apart from large multinationals, which can cross their hearts and swear they need not "emulate" others' research results, the many small and medium-sized companies in the third world operate on the edges and in the loopholes of the law. But the large multinationals, despite having only limited funds to spend on what would be unending investigations, have a strategy to deal with this situation.

"Large firms have so much information to use against small local firms," says Hsu Te-cheng, "and they are very calculating in deciding how, when and if to use it." Small companies have small resources. When what they can pay in a law suit may be lower still than the legal fees involved, large firms naturally won't be interested. Hence, the strategy is often first to fatten the chickens before slaughtering them. For instance, in the Four Pillars case, if the firm is found guilty, there will be criminal fines (under the EEA, the maximum fine is US$5 million), as well as possible compensation in the civil suit. One can imagine a scenario in which all the profits for encroaching on intellectual rights over these past few years will enter the coffers of the American government and the original manufacturer, meaning that the efforts of the copying firms were all for other people's gain.

"Copy cats shouldn't wallow in glee thinking they've taken advantage of someone else; they may well have already fallen into a trap," says Hsu Te-cheng.

Of course, when there is the possibility of cooperation between the two sides, then even if the multinational has something on the local firm, it may be hesitant to use it. For instance, in the past few years international tape manufacturers eyeing the mainland Chinese markets have come to Taiwan to seek partners for cooperation. Four Pillars, as the leading adhesive tape firm in Taiwan, was naturally viewed by many multinationals as the ideal partner. When Four Pillars chose the German firm Beiersdorf as partner, conjectures Hsu Teh-cheng, "Avery Dennison was peeved and started looking for revenge."

Avery Dennison is a major multinational manufacturer of adhesive tape, grossing about US$1.8 billion year, which represents what the 50 or 60 Taiwanese firms in the industry make collectively over the course of three years. The reality of global industry is the same as international politics, says Hsu, who warns, "Whatever you do, don't mess with the big firms. When they're involved you've got to be careful!"

The legal door is a narrow one

In many respects, when it comes to "profit," multinationals show a cold cruelty no less than that of soldiers on the battlefield. K. J. Yang, who is head of the Taiwan Pharmaceutical Manufacturer's Association, sighed with exasperation when the Yuen Foong Yucase broke and it caused such a hubbub: "The big firms can't stand it when anyone else starts to rise up, and as soon as they see that you are competition and a threat, they'll come to stamp you out!"

Taxol, now produced only by Bristol-Myers, is a new anti-cancer drug derived from the shredded bark of the Pacific yew tree. Sales have reached as much as US$1 billion a year, and Yang argues that naturally the company doesn't want to share such a large market with anyone else. Around the world, Taiwan, with its own Taiwan yew, is the greatest potential competitor to Taxol. Yuen Foong Yu took personnel from the Development Center for Biotechnology at Chiao Tung University and the Union Chemical Laboratories at the Industrial Research Institute and was aggressively working to develop the commercial value of the Taiwan yew. This incited Bristol-Myers' vigilance, and the result was that Yuen Foong Yu got caught with their hands in the cookie jar. The controversy surrounding the case-even if Union Chemical Laboratories was not directly involved-could not help but depress the research atmosphere, thus reducing the threat to Taxol.

Jack Chiu, on the other hand, points out that another scary feature of the EEA is that it is "broad" in scope, so that "theft" and "trade secrets" can be interpreted in numerous ways. It is not like trademark law, or patent law, or laws to prevent pirating which have narrowly defined applications. The US Congressional Record shows that the act was intended to be interpreted broadly, so as to have greater force. Taiwan industry can't help but fear that the EEA will become a weapon US firms use to bludgeon their foreign competitors.

An example is the US firm Princeton Biomeditech, which is suing several Taiwanese manufacturers for encroaching on its rights.

The product that is at the center of the dispute is a self-administered urinalysis test kit with yearly sales in Taiwan of more than NT$10 billion that can be used by women to see if they are pregnant or by schools and the military to test for drugs. It can even check for osteoporosis and coronary thrombosis. As early as 1991, Princeton Biomeditech received Taiwan's first patents for such a device. Afterwards, any company thinking of entering the market would have to worry about encroaching on its patents.

Cowing them into submission

Charles Chang, general manager of Charng Ching Health Diagnostic Equipment, which is Princeton Biomeditech's Taiwan distributor, argues, "The technology of the other testing devices has shady origins, and they are using super-low prices to grab the market." Within a year after Charng Ching launched these kits in the virgin fields of Taiwan, the market was flooded with low-priced competitors. This angered the company, and they started suing everybody, including the major distributors of the lower-priced kits in Taiwan and the ministries of education and defense, which are major purchasers. It stirred up quite a controversy here in Taiwan, and the case is still in the courts.

Chang, who sees the market slipping away from him, complains that this is a case where "domestic industry, government bureaucracy, academia and research groups have ganged up on us." He says that he has given all of the materials in the case to the FBI and hints that this may become the third EEA case involving Taiwan.

But Peter Lan, general manager of the National Flower Technical Trading Company, which is one of the defendants in the Princeton suit, holds that they have reports from several legally accredited domestic organizations that clearly show that the importing Taiwan firms have not encroached upon Princeton's patents. He says that the Americans are using everything at their disposal, not only asking trade representatives to put pressure on the government, but also bringing up the EEA to cow people into submission.

"Whether it encroaches on patent rights or not isn't the main point," Lan says. "They're just using the law suit in their fight for the market."

Can it be that with the outcast status of Taiwan internationally, US industry finds Taiwan a particularly easy target under the EEA? After all, two of the four cases involve charges against US firms. There are suspicions that America is selectively enforcing this law against Taiwan.

Irvin Nathan, the former principal assistant deputy US attorney general, says that this is a commonly held sentiment, but from his professional judgment he thinks that "it's not very likely" because the two cases were investigated by different local offices of the FBI. The FBI independently pursues investigations and is hard to interfere with. Of the several hundred EEA cases the FBI is now investigating, more than 23 foreign nations are involved. The Taiwan cases have just been exposed earlier.

Be that as it may, at the seminar on the EEA sponsored by the Ministry of Economic Affairs, American lawyer Sturgis Sobin also pointed out that in the broader context the EEA can be seen as the newest weapon in the American trade policy arsenal.

"Any country frequently listed under 301 for pirating or copyright infringement will naturally become a main target for EEA investigations," argues Lai Shih-pao. Taiwan has a particularly large number of students and former students in America, who collectively constitute a remarkable store of talent, and the motherland is anxious to transform its economy. This combination makes America nervous, inciting fears about forces at home and abroad conspiring against it. There are reasons that Taiwan has been singled out as the first target under EEA.

From crisis to transformation

What's most unfortunate is that communist Chinese interference has kept Taiwan out of most international economic and trade organizations, and hence when the ROC gets into disputes with other countries, it is unable to appeal to international organizations as intermediaries. For instance, under the World Trade Organization's Paris Agreement for the Protection of Industrial Property Rights, signatory nations must respect rules about intellectual property, and in the case of disputes can appeal to the WTO as an intermediary.

"A lot of countries that are taken advantage of in negotiations with America appeal to the WTO; it is the one way they can get the Americans to constrain themselves," says an official at the Board of Foreign Trade. "This is one of the reasons why we want to enter the WTO as soon as possible."

Rather than getting angry and looking for excuses, why don't we reflect upon the situation and seek improvement?

"Face outside pressure with a positive, constructive attitude," says Lai Shih-pao. If Taiwan companies can act in accord with standard practices abroad, raising their respect for intellectual property, then the short-term furor over EEA violations may work to Taiwan's advantage in the long run.

As Sturgis Sobin mentioned, protecting intellectual property rights was among the reasons for drafting the Economic Espionage Act, but the main goal was to "establish fair rules for global manufacturing." And with the new federal laws providing protection, big firms can relax when negotiating the licensing of technology or joint ventures; they no longer need to be so calculating or to keep their cards so close to the chest. Likewise, if smaller firms pay more attention to raising their own research and development capabilities, this ought to be a good development in fostering beneficial global technological exchange.

When the ancient Chinese had secret techniques, didn't they try to keep them in the family, unwilling to reveal them even when offered princely sums? From this perspective, how can it be that the Chinese don't understand the value of knowledge? Teaching the people of Taiwan how to play by the rules of international competition would be the best possible legacy of the EEA.

p.30

In the information age, knowledge is more than power-it's like money in the bank. With harsh penalties and a new name for an old crime, the US Economic Espionage Act immediately caused a huge stir in Taiwan industry.

p.32

The Industrial Technology Research Institute is researching how to make the anti-cancer drug Taxol from the leaves of the Taiwan yew. Shown here is a micrograph of a Taiwan yew leaf cutting with callus cells. Taiwan industry regards the Yuen Foong case as an instance of a little guy's research and development efforts inciting the wrath of a major multinational, which then caught the little guy taking cookies from the cookie jar. (courtesy of Industrial Technology Research Institute)

p.33

The Yuen Foong Paper Yu Company was the first Taiwan firm accused of breaking the EEA. When General Manager Huang Yi-sheng learned of the bad news, he rushed home from Europe and held a press conference in which he declared that his company was an innocent victim of entrapment. (photo by Hsiao Jung)

p.34

Because the US Economic Espionage Act holds great ramifications for Taiwan industry, the Ministry of Economic Affairs invited several American lawyers to come and speak about the law and the reasons for it.

p.35

A scene in a factory making integrated-circuit wafers. The term "trade secrets" has a broad meaning that can involve anything from research and development, to manufacturing, to management controls-any information that a firm wishes to remain secret.

p.37

Trade talks between Taiwan and the United States, which are focusing this time on Taiwan's entry to the World Trade Organization, opened under the dark cloud of charges that Taiwanese companies were trying to steal trade secrets. The WTO serves as an arbiter in international trade disputes and has great influence.

p.39

Major international trade fairs attended by many companies are among the best stages for economic espionage and counter-espionage. On the one hand, you can have a look at what the competition is offering, and on the other hand, you can see if your own trade secrets have been stolen and if anyone has infringed upon your patents.

The Industrial Technology Research Institute is researching how to make the anti-cancer drug Taxol from the leaves of the Taiwan yew. Shown here is a micrograph of a Taiwan yew leaf cutting with callus cells. Taiwan industry regards the Yuen Foong case a s an instance of a little guy's research and development efforts inciting the wrath of a major multinational, which then caught the little guy taking cookies from the cookie jar. （courtesy of Industrial Technology Research Institute）

The Yuen Foong Paper Yu Company was the first Taiwan firm accused of breaking the EEA. When General Manager Huang Yi sheng learned of the bad news, he rushed home from Europe and held a press conference in which he declared that his company was an innocent victim of entrapment. （photo by Hsiao Jung）

Because the US Economic Espionage Act holds great ramifications for Taiwan industry, the Ministry of Economic Affairs invited several American lawyers to come an d speak about the law and the reasons for it.

A scene in a factory making integrated-circuit wafers. The term "trade secrets" has a broad meaning that can involve anything from research and development, to manufacturing, to management controls--any information that a firm wishes to remain secret.

Trade talks between Taiwan and the United States, which are focusing this time on Taiwan's entry to the World Trade Organization, opened under the dark cloud of charges that Taiwanese companies were trying to steal trade secrets. The WTO serves as an arbiter in international trade disputes and has great influence.

Major international trade fairs attended by many companies are among the best stages for economic espionage and counter-espionage. On the one hand, you can have a look at what the competition is offering, and on the other hand, you can see if your own trade secrets have been stolen and if anyone has infringed upon your patents.