GM / VOLKSWAGEN: A CASE OF INDUSTRIAL ESPIONAGE

Youjung Byon

Edward Urban

Tim Nguyen

Jose Ignacio Lopez

The “Grand Inquisitor”

1969-1980: Firestone in Bilbao, Spain

1980-1986: GM Europe’s offices in Spain

1987: GM Head of Purchasing for Europe

April 1992: GM Vice President for Worldwide Purchasing

March 1993: VW Chief of Production Organization and Purchasing “warriors”

“Warriors”

Plant X

INDUSTRIAL ESPIONAGE

Employee Discontent Industrial Espionage

Information Brokers

Anti-Espionage Services

FRAUD

GM claim 4 sets of materials taken by Lopez

(1) 3,350-page listing of the 60,000 parts, their suppliers, their cost, and their delivery schedules for GM-Europe(2) GM’s future product line details(3) Detailed manufacturing and cost study of Plant X(4) Portfolio of presentation materials used by Lopez in cutting

supplier costs

German police discover 4 boxes of internal GM documents in the home of Lopez’ warriors

GENERAL MOTORS

General Motors Corp. (NYSE: GM), the world's largest vehicle manufacturer, employs about 325,000 people globally.

GM has manufacturing operations in 32 countries and its vehicles are sold in 192 countries.

In 2003, GM sold nearly 8.6 million cars and trucks, about 15 percent of the global vehicle market.

GM parts and accessories are sold under the GM, GM Goodwrench and ACDelco brands.

VOLKSWAGEN AG

FINANCIALS

COGS / Sales

-

0.20

0.40

0.60

0.80

1.00

1993

1994

1995

1996

1997

1998

1999

2000

GM

VW

Net Income

(2,000,000.00)

-

2,000,000.00

4,000,000.00

6,000,000.00

8,000,000.00

1993 1994 1995 1996 1997 1998 1999 2000

GM

VW

INDICTMENT

The Justice Department investigated Lopez and indicted him in U.S. district court in Detroit on charges of wire fraud and transportation of stolen property.

Reasoning: E-mailing documents often will fail to count as “wire fraud” because the theft does not defraud the owner within the meaning of the statute as it has been construed by the courts. (See 18 U.S.C. § 1343 (2000), amended by Pub. L. No. 107-204, 116 Stat. 805 (2002). (Also see James H.A. Pooley et al., Understanding the Economic Espionage Act of 1996, 5Tex. Intell. Prop. L.J. 177, 186 [1997]).

The government, however, was not able to charge him directly with trade secret theft because it was not a federal crime at that time.

POLITICAL & ECONOMIC DIMENSIONS OF THE FRAUDULENT SCHEME

Regulatory dimension: Trade Secrets vs. Patents

Issues of International Competition

Status Quo (before 1996):

1) The law of trade secrets fell within the scope of common law at the state level.

2) Uniform Trade Secrets Act (“UTSA”) vaguely defined “trade secret”.

AFTERMATH

VW settled with GM in 01/97.

German court fined his warriors who left GM: Jose Manuel Gutierrez (100,000DM), Jorge Alvarez (50,000 DM), & Rosario Piazza (40,000 DM). Security experts claim “penalties are nominal.”

By the time the US had indicted Lopez, he was already in Spain, his native county.

US petitioned for Lopez’s extradition, but Spanish court denied request.

To date, Lopez runs and operates an elite consulting company in Spain.

Penalties:• VW to pay GM $100 million in damages• VW to purchase over $1 billion in in parts from GM over the next seven

years (1997 through 2004)• Lopez barred from working for VW in any capacity through the 2000

ECONOMIC ESPIONAGE ACT OF 1996 (“EEA”)

In response, Congress passed the Economic Espionage Act of 1996 (EEA), criminalizing the theft of trade secrets.

The EEA significantly expands the ability of American firms to pursue trade secret protection:

1) The EEA broadens the definition of “trade secret” beyond the traditional common law definition.

2) The EEA gives the United States wide extraterritorial authority to enforce this law.

TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (“TRIPS”)

This effort resulted in an agreement under the World Trade Organization (WTO), the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, establishing uniform minimum standards of intellectual property protection for all member nations.

Though the agreement requires all member nations to adopt laws ensuring enforcement of the minimum standards, TRIPS acts merely as a floor, and indicates that, beyond meeting the minimum standard, nations are free to establish individual levels of intellectual property protections and mechanisms of Enforcement.

PREVENTION: COUNTER-ESPIONAGE IDEOLOGY

A new wave of counter-surveillance companies are hired by many companies to monitor internal company behavior and conduct (GM, BMW, Toyota):

1) They will visit your offices, most often in the evening or at weekends and carry out a thorough sweep of the premises, including telephone and fax systems and computer terminals. Even an electrical socket can be used to transmit information to your competitors!

2) Following this sweep, teams will remove any alien devices and immediately inform superior management if company is losing material through electronic surveillance.

3) This will be followed up with a full report enabling a possible trace of the leak and identification of the perpetrators.