Loss of Intangible Assets to Economic Espionage…

I routinely hear presumed experts describe how intellectual property…(IP) is being targeted, accessed, and misappropriated,  at alarming rates, as a consequence of economic espionage, competitor intelligence, and/or some form of cyber-attack.

The presumably subject matter experts, ala talking heads…often make passionate and intriguing cases regarding the proliferation and extraordinarily high dollar losses attributed to economic espionage, by, among other things…

  • eluding to, or outright naming a presumed nation state (sponsored) perpetrator,
  • assigning a ‘mind boggling’ dollar value to such losses, and then,
  • just as ‘mind boggingly’, extrapolate – convert same to annual guesstimates of IP – proprietary intangible asset losses of $500b+  annually to U.S. companies.

Not infrequently, I have observed, once the above is conveyed – confirmed, a subject matter expert’s expertise is maximized… leaving unfamiliar viewers, listeners, and readers to make their own assumptions – draw their own conclusions about who, what, when, where, how, and valuation.

So, it should come as no surprise that the IP – proprietary intangible asset loss  – value data cited…may likely be (presumably) well intentioned, but inflated – exaggerated (oft repeated) guesstimates.  The reasons for this

To further address company’s ‘IP – intangible asset loss awareness’…it’s important for developers – holders of these assets recognize that economic espionage conducted via the cyber side or human intelligence,  the loss or compromise will not likely have tangible or physical elements. In other words, the targeted – victimized company will likely still hold the assets, i.e., ownership, use, exploitation, etc.

More specifically, a company’s intellectual, structural, and relationship capital…which have been targeted, compromised, or misappropriated, remain with the assets’ originator, owner, developer, and user.  But, in an economic espionage context, the exclusivity of those assets is what has been compromised – misappropriated.  Consequently, the assets will now be exploited by others, probably competitors, which I often refer to as the end user.

There is little question that economic espionage…ala theft of IP and proprietary intangible assets by foreign entities, particularly since the passage of the Economic Espionage Act (EEA) in 1996, have risen.

The illumination of economic espionage, is due, in part, to more U.S. headquartered companies and institutions recognizing the relevance of becoming engaged in(a.) studying, surveying, and reporting losses to a range of economic espionage like losses, and (b.) aggressively pursuing the development and marketing of prevention and mitigation actions which, especially on the cyber side, not in frequently, manifest as products and/or services.

It’s not terribly remarkable that certain U.S. headquartered private sector entities, especially since the passage of the EEA… have an interest in illuminating their perspective of the perpetration, adverse consequences, and assigning (dollar) values to the losses experienced by private sector firms.  That is, whether the consequences are actually guesstimates derived from speculative findings of surveys related to economic espionage, again, the theft of IP and proprietary intangible assets by a foreign entity.

Reasons these revelations emphasize, perhaps influenced to embellish, the adverse impacts of economic espionage, include…by virtue of the passage of the Economic Espionage Act in 1996…

  1. there are various new, repurposed, and/or rebranded professional service providers in play, some bringing proprietary risk detection-mitigation applications and services.
  2. federal agencies, sectors of the U.S. intelligence community, and a variety of think tanks, along with university-based researchers and practitioners such as myself who have acquired specific ‘go to ground‘ experiences related to countering specific variables related to investigating – enforcing the EEA.

Collectively, but not so collaboratively…those having professional interests in economic espionage and compromise – misappropriation of proprietary intangible assets by foreign entities, have

  • developed methods to distinguish, monitor, track, and quantify – qualify the value of asset loss – compromise affecting U.S. private sector,
  • acquired operational familiarity with the various forms – schemes related to engaging in – executing economic espionage by arrays of foreign entities.
  • identified (qualitative, quantitative) strategies for measuring-assessing how – when – why asset losses occur, which, for me, also includes…
    • recognizing that intellectual, structural, and relationship capital, ala proprietary intangible assets are always the prelude to intellectual property.
    • targeting of specific (proprietary) intangible assets and assessing their contributory role and value before and after they are targeted for compromise and/or misappropriation.

To put it plainly, but respectively…through my lens, and 23+ years of research, experiences, and training others on economic espionage matters, there is little, if any, question that companies – institutions holding proprietary intangible assets, find its prudent today to…

  • assess the potential motive(s) and context in which economic espionage, and its variations are being presented – discussed.
  • how their calculations (values) are arrived at
  • in advance of making a buy – don’t buy decision with respect to the services – products being offered which claim to counter – mitigate risk of economic espionage.

Again, precisely how much IP – proprietary intangible asset ‘s…value, revenue generation, and competitive advantage are actually lost, is subject to debate.

Irrespective of the asset values and competitive advantages which will inevitably be compromised – misappropriated…I am confident the losses arising from economic espionage are significant, persistent, repetitive, and near inevitabilities that will continue to escalate for multiple reasons, among them being…

  1. the overall global trade and business transaction environment have become increasingly aggressive, predatorial, competitive, and ‘winner-take-all’ in nature…
  2. economic espionage and its related acts are relatively easy to commence, and there are multiple (quite stealthy) ways to achieve success….
  3. not incidentally, because it can be initiated by variously interacting ‘legacy free players’ (Thomas Friedman), i.e., individuals and groups…
  4. state sponsored (contracted) entities globally.
  5. economic espionage is not exclusively cyber-initiated conduct or actions, nor subsidized by any one particular nation state; their are many players.

Perhaps, most important to this discussion…in terms a path – thought process toward risk mitigation, is company-business leadership recognizing the now irreversible economic fact that…

  • 80+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, profitability, and sustainability lie in – emerge directly from intangible assets, i.e., intellectual, structural, and relationship capital and intellectual property, which translate to…
  • the routinely espoused notion that U.S. or other country’s companies are solely being targeted for their intellectual properties, is not only a misnomer, but a misunderstanding of where – how – when – why a company’s value and competitive advantages actually lie.

How losses – compromises in value, revenue generation, and competitive advantage of intangible assets are calculated…i.e., what factors, elements, variables should be considered in order to responsibly…

  • assign (dollar) values to losses-compromises,
  • describe an economic-competitive advantage adversary’s motives,
    • both of which are essential to designing and implementing risk mitigation.

So, what’s missing in my judgment, from some experts’ loss – compromise valuation equation…attributed to economic espionage, is the adversary’s ability to understand and/or replicate the intangible assets, i.e., the intellectual and structural capital and know how especially that are embedded in any misappropriated, infringed, or stolen intangible assets.

Know how (intellectual capital) can, to be sure, be classified as trade secrets...providing the holder consistently meets the six requisites of trade secrecy.  Either way, I can confidently report that companies would be well served if they identified and safeguarded the role and contributory value of their key intangible assets…

  • especially those that underlie their intellectual properties,
  • because that’s what the world’s economic and competitive advantage adversaries need and want most.

Please don’t misinterpret my position…it would be most unfortunate should any reader of this post elect to misinterpret my remarks. I have been a strong and consistent researcher and investigator of economic espionage and its many related issues since the mid 1990’s. In fact, I served on a professional association conference panel, along with relevant, high echelon federal agency personnel for one of the initial public ‘roll outs’ of the EEA in 1996.

Perhaps, its best to bring more clarity to my position…which is, I see little need to argue about the significance, persistence, predatoriality, and breadth of economic espionage…

I do find reason to dispute any characterization that economic espionage is solely, or exclusively, an ‘intellectual property problem’…  Intellectual property, of course, is comprised of patents, trademarks, copyrights, and trade secrets.

In today’s increasingly competitive, predatorial, and winner-take-all global business transaction environment…it’s rapidly becoming an inevitability, in my judgment, that company’s intellectual properties are not merely vulnerable, rather the probability that theft, misappropriation, or infringement will occur, at some point, during the assets’ life-value-functionality cycle is highly likely…

  • precisely, how likely, remains somewhat subjective and carries many variables, i.e., asset demand, attractivity, effectiveness of safeguards, etc.

That said, I also hold somewhat different perspectives – insights about… what most of the economic and competitive advantage adversaries target today…and it’s not solely a company’s IP.

Be assured, those global – domestic entities engaged in executing and/or enabling the misappropriation – compromise of proprietary intangible assets have, in most instances…

  • an equally strong desire to compete globally and in the same market space not unlike the rightful holder-owner of those assets.
  • I have worked, studied, and conducted much research on proprietary intangible assets and economic espionage over the past 25+ years as attested by this blog’s 650+ published blog posts and the ‘about’ section of this blog site.

I find it essential to have substantial familiarity with the economic – competitive advantage adversaries in play relative to…

  • specific transactions, i.e., the parties to –  beneficiaries of a transaction in social, political, economic, competitive advantage, and intellectual property (legal) history contexts.
  • the reality that many of the adversaries are now commencing the early stages of a second generation of businesses and individuals who possess the capability to buy – own private property, intellectual property notwithstanding, and
  • create large scale manufacturing facilities to produce the various products and/or services that can emanate from infringed – misappropriated intangible assets and their intellectual, structural, and relationship capital.

Naming culprit countries…a significant difference I, and I presume many other advocates of safeguarding intellectual property rights have noticed, is that these experts are more comfortable today, than in years past, in naming the presumed culprits and/or countries where the cyber attacks – thefts of IP originate.  In a growing number of instances, these experts freely cite either state sponsored or independent operators as the origin of the problems, often citing China, Russia, eastern European countries, and numerous other ‘legacy free’ player countries as being the primary culprits, that is the recipients and/or beneficiaries of misappropriated – compromised intangible assets

Naming ‘culprit countries’ in open source could, but its unlikely, produce potential benefits, i.e., the materialization of adverse publicity reputation risk, and thus, theoretically…

  • bring political – diplomatic pressure to bear on the named country’s legislative and enforcement bodies to be more aggressive and consistent in pursuing infringers, ala tolerating product  counterfeiting and copyright infringement, etc.
  • prompt holders of valuable intangible (IP) assets to strengthen their international business transaction due diligence to reduce asset vulnerability by putting in place practices and procedures designed specifically to sustain control, use, ownership, and monitor the value, materiality, and risk to the key intangible assets in play in both pre and post transaction contexts. (Both, represent initiatives I routinely recommend.)

Michael D. Moberly [email protected] St. Louis (originally posted) May 28, 2014 the ‘Business Intangible Asset Blog’ since May 2006, 650+ posts, ‘where intangible assets, business, and effective solutions converge’.

Please explore other relevant blog posts, video, books, and position papers at https://kpstrat.com/blog


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