How to Handle Unauthorized IP in Your Supply Chain

The threat of unauthorized intellectual property (IP) leaking into your supply chain is one that will proliferate in coming years, predicts one of the foremost legal experts on the problem. Fortunately, businesses that become aware of  these leaks can take steps to minimize the damage.


Tokyo-based Arthur M. Mitchell III, senior counsel of White & Case, warns in a widely-circulated paper on the topic that if a company has a “very long global supply chain” it is at risk of serious legal and reputational ramifications from federal or state governments — such as monetary damages or blocking goods from importation — for issues arising from patents, copyrights, utility models, and trade secrets that have not been authorized or paid for.

“Most likely the issue is software,” Mitchell told IMT, adding that the software could either be embedded within the finished product itself, or simply used to create the product. Either way, the first step for a company which suspects or knows it has purchased unauthorized IP is to “get more facts,” he advised. First and foremost is to ask the supplier in question if it is aware of the infraction. Often, he said, they are not.

“Your course of action depends on the answer you get from your supplier to that question,” said Mitchell, a former general counsel of the Asian Development Bank. “If you think the supplier is innocent, you figure out what you should do about it. You could let the owner of the IP know about it.” Before you do, however, research what state or federal laws are applicable to your position. Laws vary significantly from state to state.

For example, sister publication IMT Procurement Journal notes that Texas recently passed the Texas Uniform Trade Secrets Act (TUTSA), which takes precedence over all other state laws and empowers courts to grant protective orders to guard trade secrets.

But always report the infraction. “By reporting it you’re mitigating the damages. It’s almost always better to be proactive and self-report,” Mitchell said. “Doing the right thing is always the right thing. Authorities recognize that.”

In California, penalties can reach $2,500 per violation, Mitchell said. But if you self-report and are proactive about contacting the owner of the IP, the courts “probably wouldn’t fine you too much.”

However, if the business suspects the supplier is complicit in the theft, it should, after doing some due diligence, “terminate the relationship and ask for your money back,” he said.

There’s not a lot of precedent for these kinds of cases, Mitchell said, but he’s convinced they will become increasingly frequent. Still, even innocent parties are not going to just walk away from such situations. “The courts will ask if you took steps to ascertain if what you were getting was free from problems or not,” Mitchell said. If the company hasn’t, the authorities are going to ask, “Why not?”

And bear in mind the scope of the problem. If a minor component, like a screw in a much larger product, is made using pirated IP, the implications are not as severe as it were a core technological component.

In his paper, Mitchell gives an example of an egregious case in which a Korean company, Kolon Industries, stole IP relating to DuPont’s Kevlar technology and was assessed damages of $919 million. In such a case “you can lose your supplier and your goods could be excluded in the U.S.”

If a company finds it has a problem with unauthorized IP, “do your own investigation, go to your supplier with evidence,” Mitchell advised. “Examine your contractual relationship, and go to the authorities. You have stolen property in your supply chain. Any reputable business would not agree to that.”

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