Where are the lawsuits?

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Where are the lawsuits?

The other day someone asked us where the lawsuits were over loss of intellectual property. After all, we (among others) have been saying that at $300 billion a year, the preventable loss of intellectual property and critical information to competitive intelligence, economic espionage, theft, and inappropriate disclosure would soon come with a costly penalty attached.

As it happens, there have been a number of such lawsuits, but in each case they have been settled long before reaching court. This is no surprise: If the company went to court over preventable losses for which they did not have required internal controls, it would have been even more expensive. Plus, the likelihood is that had any of these cases actually gone to court it would have forced the involvement of the SEC, which would have been more costly still. This is because the SEC allows companies to determine for themselves what constitutes being material. But if they decide wrongly, as shown by shareholder suits, the SEC is likely to appear on the scene doing its best imitation of a dropping ton of bricks.

How expensive was the experience for the companies involved in these lawsuits? Unfortunately, settlements tend to be confidential, so we don’t really know. But all indications are that the settlements cost a great deal more than it would have cost to implement a best practices OPSEC program, which would have prevented the lawsuits from being filed in the first place. In fact, we would guess that the cost of litigation was more than it would have cost to implement an OPSEC program!

And this doesn’t include the losses themselves! Again, the best estimates are that the average cost of an incident in a manufacturing environment is $50 million, and $500,000 in a non-manufacturing environment, with a second and third incident commonly being discovered. While corporate counsel may assure you that losing $100 million is not material, your CFO, who understands the importance of money and who has to put his signature on your financials, should tell you otherwise. In Jeremy Hope’s Reinventing the CFO (which we will discuss in a future issue), American Express CFO Gary Crittenden discusses measures which saved $100 million a year. If $100 million matters to American Express, it probably matters to you.

And don’t think that the lawsuits are going to go away. It is the projection from our insiders in the activist shareholder arena that loss of IPCI is going to be a major issue in shareholder suits, and management shakeups. One is currently underway wherein the shareholders are attempting to reverse management’s bonuses of the previous two years and terminate management for cause. The activists are making an aggressive claim that, if IPCI lost were reflected in the balance sheets, the write down would have wiped out the profits on which the bonuses were paid.

In the best of all possible worlds CFOs would insist that OPSEC programs be put into place, but many are still unfamiliar with the problem, even when it is happening to their company. We like to think that as the lawsuit bandwagon picks up speed and volume this will change, with CFOs finally starting to implement internal controls to eliminate these needless losses.

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