Battling Trade Secret Theft in Taiwan

Here we go again. Last week, police detained three employees of Taiwanese smartphone-maker HTC, raided their homes and offices and seized their computers and cellphones to search for evidence, as HTC is accusing them of stealing sensitive technology to use in competition with HTC in China.

The three men – a vice president of product design, director of R&D, and senior designer – are accused of stealing secrets relating to HTC’s Sense 6.0 smartphones, which are scheduled for launch later this year. While the investigation is just beginning, reports have accused the three of collaborating with officials in Chengdu, China to form a competing smartphone company in China using the secrets stolen from HTC. They are also accused of defrauding HTC out of more than US$650,000, by use of forged documents, apparently to raise capital for their new venture.

Taiwan has seen similar cases before. In 2012, the nation’s second largest LCD panel-maker, AU Optronics (AUO), sued two of its former high-level executives for stealing trade secrets, which they took to their new employer, a major competitor in China. In 2011, Taiwan IC-design company, MediaTek, sued a former employee for stealing secrets and sharing them with his new employer. And, most famously, Taiwan Semiconductor Manufacturing Co. (TSMC) battled with its Chinese rival, Semiconductor Manufacturing International Corp. (SMIC), for almost a decade over allegations that SMIC poached numerous employees, who stole critical information that SMIC used to illegally manufacture competing products.

Of course, theft of trade secrets by employees is not unique to Taiwan. Study after study shows that, worldwide, trade secret lawsuits are filed most often against employees or former employees, followed by business partners. However, victims in Taiwan find it particularly challenging obtaining relief, partly because the nation lacks a formal discovery system and partly due to inadequate criminal penalties.

To overcome the lack of civil discovery, victims in Taiwan often file a criminal complaint first, requesting the authorities to launch raids and gather evidence in the criminal proceedings, then file a civil case ancillary to the criminal action, as any criminal evidence should be admissible in the civil case. This tactic has an added benefit, as significant filing fees are required for civil suits but not for ancillary actions.

However, that tactic is not always successful. In a case I handled, a Taiwan tech company filed a criminal complaint alleging that three former employees had stolen trade secrets that they were using illegally at a new place of employment, the police raided the new place of business, found the stolen data on their computers, but refused to press charges due to difficulty proving the new employer was aware of the misappropriation and using the secrets.

Another means of overcoming Taiwan’s discovery hurdle, provided one can prove jurisdiction, is to file suit in the U.S. The TSMC case started in Taiwan and China but quickly made its way into U.S. courts, until the parties finally reached a global settlement, with SMIC agreeing to pay TSMC $200 million and 8% of SMIC’s shares. TSMC’s General Counsel, Richard Thurston, later explained, “People ask me why I sued in the U.S. One of the main reasons is that I can get discovery in the U.S. that I can’t get here. And, in the case of trade secrets, you can’t win without discovery.”

And recently there has been a surge in ITC proceedings regarding trade secrets stolen by Asian respondents, including Certain Paper Shredders, No. 337-TA-863 (2013), Certain Robotic Toys, No. 337-TA-869 (2013), Certain Rubber Resins, No. 337-TA-849 (2012), Certain Electric Fireplaces, No. 337-TA-791 (2012) and Cast Steel Railway Wheels, No. 337-TA-655 (2010). Of course, ITC proceedings are only effective against the company receiving stolen secrets, not the individual wrongdoers, and one must satisfy the “domestic industry” requirement.

As for Taiwan’s criminal penalties, their insufficiency was dramatically illustrated in the MediaTek case, when the defendant was found guilty and sentenced to 9 months in prison, but the law – as it then stood – allowed him to avoid jail time by paying a fine of less than US$10,000. However, in response to industry pressure, Taiwan’s government amended the Trade Secret Act earlier this year, including increasing the penalties, so one who misappropriates trade secrets in Taiwan with the intent to use them overseas may be imprisoned for up to 10 years and fined up to US$1.7 million, or possibly more if there are substantial illicit gains.

It remains to be seen what affect, if any, the amendments to Taiwan’s Trade Secret law may have on the HTC case or others, and the HTC investigation is just beginning, but one thing is certain: an ounce of prevention is worth a pound of cure. In Taiwan, as elsewhere, prudent companies should carefully evaluate their present systems and practices and ensure that they take all reasonable measures to protect sensitive information, including with respect to hiring, physical security, limited access, employee trainings, and the like, to reduce the likelihood of problems occurring in the first place.

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If you have questions or require assistance, please contact a Taiwan trade secret lawyer.

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