If We Told You That, We’d Have To... You Know...

By Steve McDaniel, PhD, JD, Technology Litigators, Contributing Editor | January 24, 2012

Protecting novel compositions and processes.

The story is told that when a master brewer in the early 1930s retired from a successful German beer manufacturer, it dramatically impacted the company’s business, which had grown on the fame of one of his beer recipes. Even though the brewer taught the recipe to his colleagues before his departure, none could duplicate his results. When they brought him out of retirement to reteach his acolytes, the effort failed when he left the plant to head back to his retirement cabin in the Alps.

Desperate to understand its repeated failures, the company filmed every step in the brewing process, starring none other than the master brewer himself. Even with the motion picture log of the process, the company failed to duplicate the master brewer’s results.

Then something caught the eye of a student brewer studying the film. Just prior to closing the vat door and beginning the brew cycle, the master brewer would stick his head into the vat for just a moment, apparently looking for something in the mash suspension of grain, sugars and yeasts. 

The young colleague rushed to the mountain retreat with film and projector in hand. He asked the old brewer what he was looking for in the vat. “Oh, I am not looking for anything,” the master brewer said. “I am spitting in every batch for good luck.  Of course!” 

It turns out the enzyme amylase found in human saliva was initiating a chain reaction that eventually kicked off the growth of the special strain of yeast needed for the company’s special brand of beer. Without that tiny bump, this particular yeast went off in another metabolic direction that, while it produced beer, failed to produce the famous and very profitable suds. This little fact was kept as a closely held trade secret for many years, surviving even war and concerted attempts by competitors to reverse-engineer the results, making many German marks of profit for the company.

Coatings On Tap

The paint and coatings industry is also one whose recipes tell only a part of the story. We produce many high-solids suspensions, with many ingredients, using many process steps all of which are embodied in the product on the shelf. But, even with the product in hand, and even with the publicly available Materials Data Safety Sheet, a competitor is sorely pressed to duplicate the coating in many cases. The more complex the coating formulation, the more intricate are the process steps, the greater the number of minor additives, the greater is the task of the copyist.

In some cases, we patent these novel compositions and processes. However, in many others, like the master brewer we keep the “good luck spit” to ourselves as a closely held trade secret, and aggressively try to prevent its disclosure. Sometimes, we fail at the latter. This is why we continue to see high-profile cases of trade secret theft of paint formulations and processes.

My legal career has been made prosecuting intellectual property misappropriation.  In view of increased competition in a climate of economic uncertainty, it felt like the right time for a forum to routinely discuss intellectual property protection in the paint and coatings industry.

From time to time the impact of higher profile instances of such intellectual property thievery have been covered by Tim Wright in Coatings World’s Editor’s Page while the financial implications of illegal competition have been discussed by Dr. Phil Phillips of Chemark Consulting and Coatings World’s regular “Business Corner” columnist. So, I talked with the editor at Coatings World about having such a dialogue.  He agreed, and here we go.

Over the course of the next year, this column—IPaint—will broaden and build upon those discussions and cover specific intellectual property issues relevant to the paint and coatings industry. The major theme of IPaint will be trade secret protection, patent protection and the interplay between them. 

Some topics to be covered include departing employee practices, in-house trade secret protection, and best practices such as trade secret audits to strengthen and expand intellectual property protection. We will also get into the sorts of agreements routinely used to protect these sorts of assets, and the pitfalls of these agreements for which to be on the lookout.

Also, the issue of how to manage trade secrets in the burgeoning economies of the world with less well-developed intellectual property laws will be covered. You will find how to value these sorts of assets, and how to best transfer them upon sale, merger or acquisition in order to extract maximal value. Or, if you are the purchaser, how to insure you get the goods for which you have bargained and paid. You will also learn how to grow and nurture the intellectual seeds you plant so that they garner the best possible protection from the get-go.

In doing all of these things, I make you the reader this promise: IPaint will assiduously avoid dry legal recitations of case law or “blackbook” strings of citations. As it turns out, the events that will provide the best education about how to protect our intellectual property assets are real-world cases of bad guys. Bad guys who are really bent on the heist, who are really stealing formulations, ingredients and processes that are really valuable to the victim company. The drama of theft and illegal competition abounds in our industry, so it turns out that we won’t have to dig too hard to find them.

Take the case of the PPG executive charged for illegally exporting hundreds of gallons of a high-performance industrial epoxy coating to the Chashma 2 nuclear power plant in Pakistan (owned and operated by the Pakistan Atomic Energy Commission, an entity on the Department of Commerce’s list of prohibited entities to whom to export American goods). A former managing director of PPG Paints Trading (a wholly-owned Shanghai-located subsidiary of PPG Industries) Xun Wang was arrested on June 16, 2011 in Atlanta, Ga.

After PPG Industries sought an export license in January 2006 for the shipments of the high-tech coatings to Pakistan, it was denied in June of that year.

Wang and her co-conspirators schemed to, and did in fact, illegally export the coatings from the U.S. to Chashma 2, via a third-party distributor in China. The action was intentionally concealed from PPG Industries that the paint would be delivered to the Pakistani reactor. Instead, the conspirators falsely stated that the coatings were to be used at a nuclear power plant in China, the export of goods to which would not require a license from the department of commerce.

Why not just have the coatings reverse-engineered in the U.S. or China? Why not just take the MSDS for the coatings and have them made by a contract formulator? Certainly, there would appear to have been time enough to do so, as the indictment alleges that Wang and her co-conspirators exported three shipments of coatings from the United States to Chashma 2 without the required department of commerce license. The obvious answer is that the apparent ease (in the eyes of the thieves) of illegally exporting the coatings significantly out-weighed the difficulty (perhaps practical impossibility) of extracting the trade secret formulations.

Or, consider the case of a former Valspar employee admitting to stealing trade secrets from the paint maker with plans to take them to a new employer in China. David Yen Lee worked as a technical director at the Wheeling, Ill., facility of Minneapolis-based Valspar from 2006 to 2009, prior to agreeing to start employment in Shanghai at Nippon Paint as its vice president of technology and administrator of research and development. The pocket-sized thumb drive he had in his possession when he was arrested contained Valspar data worth USD$7-20 million. Lee ultimately bargained a plea with federal prosecutors and received a 15-month sentence.

As a technical director at Valspar, Lee had access to Valspar’s secured internal computer network, including access to trade secrets in the form of proprietary chemical formulas, paint properties calculations, and emerging research and development information. For about four months prior to his departure, Lee admitted downloading trade secrets from Valspar’s secured computer system. 

According to Dr. Larry Brandenburger, Valspar’s vice president for research and development, who knew Lee as a colleague, the departing employee mechanisms in place at the time for detecting trade secret misappropriation worked.

“It demonstrated to us how critical it is to apply these techniques to each and every employee with access to trade secrets, no matter how unlikely you believe it is that the employee would attempt to misappropriate your confidential information,” said Brandenburger. 

Valspar used lessons learned from the events surrounding the case to improve its trade secret protection processes making them even tighter, according to Brandenburger.

So, moving forward what I hope is that you Coatings World readers will open a dialogue with us about protecting valuable paint and coatings intellectual property assets. Through this dialogue I will introduce you to tools that you can apply on a day-to-day basis to protect the “good luck spit” in your product portfolio.

Technology Litigators (McDaniel & Assoc. P.C.) was founded in 1999 by Steve McDaniel, Ph.D., J.D. in Austin, Texas. The firm is a full-service intellectual property law firm with a particular focus on trade secret protection. For more information visit them online at www.technologylitigators.com.

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