Missing The Train

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Missing The Train

Transportation is big business, and the manufacture of trains, planes, and automobiles is rife with opportunities for loss of intellectual property and critical information (IPCI).

An interesting case involves Lionel and MTH Electric Trains. This case, which has been in litigation for seven years, alleged that Lionel stole train designs from MTH. In 2000 Lionel moved manufacturing to South Korea, which already manufactured trains for MTH. A South Korean court found Lionel’s Korean subcontractor guilty of paying an employee of MTH’s subcontractor to steal train designs. It appears that the litigation may finally be settled, thus averting one or the other, or both, going out of business. The interesting part, for us, is not the fact that the case involved foreign subcontractors.

Rather, it is that the case involves companies that most people might not think of as being targets of espionage. For a start, we are talking electric trains – toy electric trains. Toys!

In addition, we are not talking big bucks here: The total value of the entire American toy electric train industry is less than the annual remuneration of the half dozen top managers of the half-dozen top companies on the Fortune 500 list. In fact, if you were a senior manager at one of these large companies, the value of the entire industry would be too small to care about.

This helps explain why senior managers are not concerned with losses from competitive intelligence, economic espionage, inappropriate disclosure, and theft: From their perspective the sums are simply too small. After all, if you are a $50 billion company, the loss of $100 million – the equivalent of losing $40 if you earn $20,000 – isn’t seen as material. However, $100 million is not $40. $100 million is closing a division the size of a large small corporation; hundreds of jobs lost; and the loss to shareholders of $100 million. We suspect this is why the SEC requires internal controls. But as long as shareholders don’t care about the loss of revenue, and it has no adverse effect on senior managers, it is seen as not worth bothering with. Interestingly, small corporations, who do get put out of business by losses of $50 or $100 million, and who have no SEC requirements for internal controls, take no protective measures, either. The issue is not that the money is not material. Rather, that they know that nobody cares about their business. If you make electric trains you know you are pretty much safe from loss of IPCI: After all, who would bother to steal from a toymaker?

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