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Safeguarding Trade Secrets

Taiwan's NT$2 Trillion Threat


Taiwan's NT$2 Trillion Threat


Key employees of Taiwan's high-tech companies are defecting to Chinese and Korean competitors, threatening the country's competitive edge. Taiwan could learn from the United States in stemming the loss of vital trade secrets.



Taiwan's NT$2 Trillion Threat

By Liang-Rong Chen
From CommonWealth Magazine (vol. 565 )

In Taiwan, whenever a big corporation takes an employee to court they are critically characterized as "a whale taking on a shrimp."

However, in the wake of the Taiwan high tech realm's most closely watched court case in 2014 – a trade secrets infringement case brought by MediaTek against its  former smartphone chip division head Yuan Di-wen – things may have changed for good.

One December day last year at the Intellectual Property Court, the two opposing camps, dressed in barristers' robes, sat in opposite corners awaiting commencement of the trial.

Representing the world's third-largest IC chip designer, MediaTek, were three young female lawyers from Baker & McKenzie and MediaTek itself conversing quietly among themselves.

Their opponents were two illustrious lawyers to the stars, including Chen Ming and Formosan Brothers (FB Law) partner Chih Tai-yi – who represented the Kuomintang in Ma Ying-jeou's suit against Wang Jin-pyng – and Chen Wen-cheng, former chief civil court justice who went into private law practice after retiring from the bench.

The "little shrimp's" legal team clearly was far better known and had more experience than the "whale's" team. Moreover, it had already handed the whale a setback. MediaTek accused Yuan Di-wen of copying over 2,000 computer files onto an external hard drive the day he left his position, an act of industrial espionage if true. Six months earlier, however, the Hsinchu Prosecutors Office dropped the case, citing a lack of evidence.

 "Their criminal case wasn't prosecuted, so what good is bringing up civil charges. It's just a waste of time!" said Chen Ming eyeing his opponents, a smile on his face.

Warning Sign: Heavyweight Defections

Yuan Di-wen was a rising star at MediaTek and the trusted lieutenant to former executive vice president Hsu Ji-chang. Yuan rose to the position of technical director before the age of 40, where he was in charge of the entire smartphone development team. And he was the key person in the middle of the "knockoff phone" storm at MediaTek a decade ago.

A source familiar with the situation notes, "MediaTek as we know it only exists today because of his ability to inspire a whole team."

After Hsu Ji-chang stepped down from MediaTek, Yuan Di-wen, then president of MediaTek's Wireless Communications Technology Division, was transferred out of the division he personally established, subsequently left MediaTek in February 2012.

Thirteen months later, MediaTek President Hsieh Ching-jiang learned through a friend that Yuan Di-wen had taken an executive vice-president level position at Chinese competitor Spreadtrum Communications. The friend showed Hsieh a cell phone photo of the minutes of a Spreadtrum executive meeting that included Yuan's name, confirming the news.

 "Others were surprised, but I wasn't in the least," said a former MediaTek executive and former colleague of Yuan's. Understanding Yuan's displeasure at being transferred out of the smartphone division, he added, "That (Spreadtrum) would definitely be the most effective stage to make a new start."

Although several years ago Spreadtrum was called "the MediaTek of China," it suffered years of consecutive losses. Over that time, MediaTek executives at Yuan's level would never have give the company any consideration.

But the situation has changed rapidly and considerably, and Spreadtrum has been incorporated into the Tsinghua Unigroup, bolstered significantly by a 120-billion renminbi national semiconductor support fund.

However, given MediaTek's noted strength working as a team, the defection of Yuan Di-wen alone to Spreadtrum did not necessarily pose a significant danger. What is more, "His expertise was only limited to 2G-era things, while now it's all Android, which is totally different," a smartphone insider offers.

What MediaTek was really concerned about was the possible chain reaction that Yuan Di-wen's defection to Spreadtrum might trigger because of the respect he commanded in the company's smartphone division.

Shock: Former HR Manager Defects

Court documents show that MediaTek accused Yuan Di-wen of "…familiarity with the expertise of related employees. Clearly, Spreadtrum has been able to entice (MediaTek employees) away in such a precise, targeted manner as a result of information provided by the accused."

Starting just after Chinese New Year of 2014, MediaTek engineers received frequent phone calls trying to entice them away with double or triple their current pay. Feeling besieged, some engineers reported the behavior to their supervisors.

MediaTek corporate vice president and legal counsel, Wei-fu Hsu, noticed that the other side knew all about MediaTek's inner workings. The phone calls were often directed to the top performers in each team, focusing on R&D personnel with different areas of expertise in hopes of assembling defectors to form a complete product development team.

Following clues, MediaTek discovered that the individual aggressively working to recruit personnel away from the company on behalf of a headhunting firm was Ms. Lin Bi-yu, a human resources executive that had departed MediaTek three years earlier. She even let it slip out to someone she was attempting to recruit that "you would be working for Spreadtrum."

Police searched Lin's residence in October 2014. According to MediaTek, they found a large collection of confidential personnel data in her computer, and as a result are planning to take her to court on charges of violating the Trade Secrets Act.

What was an even greater shock to Wei-fu Hsu was the addition of a new member to Yuan Di-wen's golden legal team – former MediaTek corporate counsel, Wei Jia-li. She left MediaTek for a position at German conglomerate Bayer two years ago, but more recently went into private practice and was representing her former colleague in the fight against their old employer.

 "Some of my former top lieutenants ran off to represent Yuan Di-wen. Can you still say this is a case of a shrimp versus a whale?" retorts Wei-fu Hsu. "Doesn't something seem a bit fishy here?"

Crisis: Crippling Blow to Competitiveness

The pressure Wei-fu Hsu faces is familiar to Taiwan's display panel industry dating back five or six years. At that time, the former director of Chimei's optoelectronics TV panels division, Chen Li-yi, departed for China, where he founded China's first 8.5 generation LCD-TFT plant in Shenzhen for CSOT, attracting over 100 low- and middle-level managers from AU Optromics and Innolux.

In late 2011, President Ma Ying-jeou took part in a dialogue with industry representatives at the Hsinchu Science Park. The first to unleash pent-up frustration at having suffered greatly from the defection of numerous executives to Chinese enterprises was BenQ Group President K.Y. Lee. He demanded that the government face the seriousness of the loss of competitiveness of Taiwan's high tech industry created by China's poaching of talent in Taiwan.

Both Lee and American company Corning proposed that Taiwan emulate the U.S.'s Industrial Espionage Act, meting out severe criminal penalties and high civil restitution for the theft of business secrets.

 "Ma Ying-jeou was listening," asserts Wei-fu Hsu.

  The subsequent revision of the Trade Secrets Act can be considered the most efficient revision to a law in recent history in Taiwan. Responding to calls from industry members, the government unveiled the revised Trade Secrets Act in just a year and three months, promulgating the new law in February 2013.

"Rarely have I seen a bill passed so quickly," observes Sylvia Fang, vice president and legal counsel at Taiwan Semiconductor Manufacturing Co. (TSMC).

Remedy: Legal Self-preservation

Another legal measure that complemented the amended Trade Secrets Act took effect in June 2014 – namely "legal surveillance." In cases of attempted theft of trade secrets for overseas use, investigators are now empowered with the legal right to eavesdrop, this being the most significant breakthrough in the revised law.

This has been termed by the business community as the "Corning Clause."

One official involved in the revision revealed that years ago Corning discovered that a Taiwanese employee had given stolen manufacturing technology secrets to China, but that it was handcuffed by an inability to collect evidence. Investigative agencies wanted to use eavesdropping to gather evidence, but had no legal basis upon which to do so. Corning consequently joined with the American Chamber of Commerce to aggressively lobby the government to amend the law, finally resulting in revisions to the Surveillance Act last year, incorporating the Trade Secrets Act into its scope of application.

Stuck: Squeezed by China, Reluctant to Speak Out

Advanced Western countries are also feeling the pinch of the "China threat," and no one is under more pressure than the United States as the holder of the world's most advanced industrial technology.

In 2013 the U.S. Office of the President issued a paper entitled "Administration Strategy on Mitigating the Theft of U.S. Trade Secrets." The report, over 100 pages in length, lists 20 major cases of theft of U.S. corporate trade secrets over the previous year, over 80 percent of which involved China.

The paper argues that China and Russia "are the most aggressive collectors of U.S. economic information and technology." It also said that the Chinese government, through its intelligence services, and other entities, "frequently seek to exploit Chinese citizens or persons with family ties to China who can use their insider access to corporate networks to steal trade secrets using removable media devices or e-mail."

As CommonWealth Magazine looked into this story, a number of corporate executives were aware of this, but due to their high reliance on the China market repeatedly asked our reporters to place the story's emphasis on "an isolated bad vendor," and to please not link their company's trade theft cases with the Chinese government in any way.

"The China market is too important for us; we don't want to given the impression that we are adversaries," one of the executives said.

One vice president at an international firm, a victim himself, responded in similar fashion. Privately, he expresses grave concern, anxiously stating, "The revelation of trade secrets is a national security crisis. If China keeps stealing like this, Taiwan is doomed!"

On the record in formal situations, however, he says nothing about the situation, never acknowledging that his company has had secrets stolen by Chinese companies. "Foreign firms such as ours have huge investment interests in China. If we get China angry, it's game over," he explains.

 "We're going to aggressively protect our intellectual property. Our single greatest asset is the innovation and the ingenuity and creativity of the American people. It is essential to our prosperity," asserted US President Barack Obama, addressing trade secrets in a speech at the Export-Import Bank's annual conference.

Replace "America" with "Taiwan" and those words would be just as poignant.

Translated from the Chinese by David Toman