THE MAGAZINE

License to Steal

By Megan Gates

You’ve probably heard of Fellowes, Inc. The company makes paper shredders that are used in businesses worldwide, from mom-and-pop shops to multinational corporations. But its equipment may bear a different name in China, if it can be found at all. And the technology that went into those machines is now being conscripted for use in other technology that will compete with Fellowes’ own products, with none of the proceeds going to Fellowes. That’s due to a joint venture with a Chinese firm gone bad, a deal that led to the theft of trade secrets that staggered Fellowes and continues to bedevil the company today.

In the mid-2000s, Jiangsu Shinri Machinery Co. established a joint venture with Illinois-based Fellowes to open a product facility in Changzhou, China. Besides shredders, Fellowes, Inc., uses patented processes to manufacture various other types of office equipment, such as air purifiers and laminating machines. After the two entities entered into their agreement, Shinri changed ownership and the company insisted that Fellowes assign proprietorship of the production tools in the joint venture to Shinri. The company also made various other requests, including that Fellowes sign over its engineering capability to the Chinese firm.

When Fellowes refused to meet Shinri’s demands, the Chinese company locked all of the 1,600 joint-venture employees out of the production facility in China, placed security guards at the gates to prevent the removal of the production tools and the 70,000 finished shredders, and transferred joint-venture funds to a Shinri-controlled bank account. To try to stop the takeover, Fellowes pursued legal action, and a court preservation order was filed to stop Shinri from accessing the facility in China. However, Shinri violated the order by driving a truck into the facility and stealing several Fellowes-owned injection molding machines used in the manufacturing process.

Shinri then sought legal action on its own and initiated judicial proceedings to liquidate the joint venture and auction all of its remaining assets, which would allow Shinri to purchase the remaining equipment, real estate, molding tools, and unshipped shredders. This would also give the company access to Fellowes’ engineering expertise and intellectual property, giving it a leg-up in its competition with the American company in the shredding business. Shinri has begun marketing shredders to potential buyers in Europe, and Fellowes estimates that its cumulative losses from the trade secret theft exceed $100 million.

This series of events was documented in a recent report by the Center for Responsible Enterprise and Trade (CREATe.org), a nonprofit advocacy group that helps companies, suppliers, and business partners reduce corruption and intellectual property theft. Its latest report details the continued challenges that businesses are facing in managing the growing threat of trade secret theft.

“What used to be the stuff of James Bond movies and spy thrillers that were often times government-on-government espionage has really now gone into the industrial espionage realm with the number of newly emerged and emerging economies around the world,” says Rick Martinez, a partner practicing intellectual property law at Robins, Kaplan, Miller, & Cirisi. “And due to the advent of reliance on computerized systems that are all networked, you have greater and greater risk of trade secrets actually being not just accidentally lost, but stolen from you through acts of industrial espionage.”

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