Industrial Spying Case Winds Down

The case is about glue, adhesives, disposable-diaper tape and the high technology of no-lick stamps. It is also, federal prosecutors contend, about criminal espionage.

In the first trial to come from the Economic Espionage Act of 1996, two executives with a Taiwanese firm are accused of stealing industry trade secrets from Pasadena-based label-maker Avery Dennison Corp., paying an Avery researcher $160,000 to spirit out secrets.

The case moves the age-old tradition of corporate spying from the realm of civil lawsuits--where getting caught and settling a suit was often considered the cost of doing business--into the land of criminal activity and potentially long stints in federal prison.

And it comes at a time when so-called intellectual property is becoming the single most valuable asset at many American companies--and at a time when theft of that knowledge is skyrocketing, from an estimated $100 billion in annual losses in the 1980s to more than $250 billion in 1998, according to James P. Chandler, the author of the act.

The trial of Pin Yen Yang, 72, founder of Avery competitor Four Pillars Enterprise Co. Ltd., and his daughter, Hwei Chen “Sally” Yang, 40, is the first real test of the law, which was designed to raise the ante for industrial spying. The government also hopes that it will create a tool for prosecuting such crimes in the computer age, when secrets are often passed electronically rather than in the false bottom of a briefcase.

“This is the first glimpse we will have of how this law will be handled by the judicial branch of our government,” said Chandler, president of the National Intellectual Property Law Institute in Washington, D.C. “How the judge and jury handles this case is going to give us a glimpse into the future . . . of economic espionage.”

Closing arguments in the trial, in which the Yangs are charged with economic espionage, money laundering and mail fraud, concluded Friday in federal district court in Youngstown, Ohio. The jury is expected to begin deliberations Monday.

Both well-educated scientists, the Yangs face 10 years in prison if convicted of espionage and as much as 20 additional years on the other charges.

Cases of industrial spying “have been around for a long time, but they were always [settled] by one business suing another,” said John Shepard Wiley Jr., a former federal prosecutor who teaches intellectual property law at UCLA. “It’s a far different matter for a business executive to be facing prison . . . than merely paying civil damages.”

The story of how the Yangs allegedly paid an Ohio-based Avery employee to pass along the secrets of “sticky stuff,” in the words of an Avery spokesman, is classic spy material, complete with sting operations and hidden video cameras, and with the Avery employee eventually working with the government to catch his alleged overseas benefactors.

It began, according to the Justice Department, in 1989, when Avery employee Ten Hong “Victor” Lee gave a lecture on pressure-sensitive adhesives at a research institute in Hsinchu, Taiwan.

After the lecture, a former instructor of the Taiwan-born Lee who worked for Four Pillars asked if Lee would deliver the lecture again, this time to Four Pillars officials, according to the Justice Department. He did, and a few days later met privately with Four Pillars founder Yang.

According to government prosecutors, Yang asked Lee, a naturalized U.S. citizen, to become a “consultant” for Four Pillars and offered to pay him for his services.

For the next eight years, Lee supplied Four Pillars with some of Avery’s most closely held secrets, prosecutors said, including chemical formulations for Avery’s diaper tape and a battery-label laminate the company was developing for DuraCell’s PowerCheck battery.

Payment for Lee’s services was allegedly laundered through members of his family in Taiwan.

Officials at Avery declined to estimate the value of the information, saying that figure will be determined by a jury in a federal civil suit the company has filed. An initial FBI estimate placed the losses as high as $200 million.

For its part, Four Pillars has filed a $262-million civil suit in Taiwan, accusing Avery of stealing secrets during negotiations over a possible joint-venture in the late 1990s and early 1980s.

Avery first learned of a possible leak when the company tried to hire a Four Pillars scientist, according to court documents. The scientist turned down the job, but allegedly told Avery officials that they had a problem: Someone was leaking secrets to Four Pillars.

Avery hired a private investigator, and in October 1996 went to the FBI. Special Agent Michael Bartholomew testified that he set up the first sting.

In January 1997, Lee and other Avery officials were invited to a meeting and told of a file containing secret details of the company’s business plans in Asia. According to the government, a video camera later captured Lee going through the file.

FBI agents confronted Lee in March 1997. He pleaded guilty to one count of wire fraud and agreed to cooperate with federal investigators. He will be sentenced following the outcome of the Yang case.

In September, with Lee’s cooperation, a second sting was set up.

Lee drove to the Westlake Holiday Inn in Cleveland with a secret Avery patent application and other proprietary documents, prosecutors said, and met with the Yangs in a room monitored by a concealed video camera.

Jurors were shown a video of Lee handing documents to the Yangs at the hotel, and the Yangs then using a knife to slice out portions of the documents--portions, prosecutors contend, that contained the Avery Dennison logo and printing that indicated the documents were privileged and confidential.

The Yangs were arrested several hours later at the Cleveland airport as they were about to leave the country.

Displaying a host of easily obtainable technology books that Lee had mailed Yang over the years, defense attorneys argued that what was changing hands was public information, not proprietary secrets, and that Lee was hired to consult for Four Pillars, not steal for the company.

A Four Pillars spokeswoman said before the trial, “The case is a business dispute in which the government has decided to take sides.”

Many observers agree that before the 1996 law, the case would probably have been handled as a business dispute. And they are watching now to see if anything has changed.

Regardless of the outcome, one facet of the act has yet to be hashed out in court--the part that broadens the definition of transferring stolen trade secrets to include electronic trafficking.

A handful of cases involving stolen computerized information has been settled before trial, including one in which a consultant for the accounting firm of Deloitte-Touche attempted to sell confidential software information to competitors. She pleaded guilty and was sentenced to 48 months in prison and ordered to pay $337,000 restitution.

“What you used to do with a trade secret was lock it in a safe, lock the office and put guards around the building,” said Scott Charney, chief of the Justice Department’s Computer Crime and Intellectual Property Section. “Now it’s on the Internet. Increasingly in an information economy, the valuable stuff we have is intangible.”

But, he added, regardless of the medium, “the theft of trade secrets is just that--theft.”