The Hidden Battle for IP Protection in Alliances
Predatory partners can extract valuable intellectual property and learn the practices companies use to protect it. Here’s why companies need a multilayered defense.
Taylor Callery
Strategic alliances are indispensable for accessing specialized resources, capabilities, and know-how that companies cannot easily develop in-house. However, despite being critical for innovation, alliances can be fraught with distrust, particularly regarding concerns about losing intellectual property (IP).
A telling case is the failed alliance between American Superconductor Corp. (AMSC) and wind turbine producer Sinovel. AMSC provided essential software for Sinovel’s turbines, but Sinovel reverse engineered the software to introduce its new turbines without AMSC. This IP leak led to a devastating 84% drop in AMSC’s stock, forced the company to cut 700 jobs, and wiped out $1 billion in shareholder equity.1
In another recent case, sportscar maker Saleen Automotive accused its joint venture partner of filing 510 patents based on proprietary Saleen technologies and trade secrets worth $800 million, without crediting Saleen’s inventors.2
These cases illustrate how alliances can turn into IP battles, with grave consequences for companies that fall prey to predatory partners. Such battles are more common than may be apparent to external observers, since they rarely receive publicity. Our research reveals that at least 50% of alliances encounter traceable knowledge spillover, and our interviews with executives suggest that this is a key concern in most strategic alliances.3 Nevertheless, only 10% of such incidents culminate in legal IP disputes. Most conflicts over IP do not escalate to court battles and are deliberately kept out of the media because companies often depend on their partners for their ongoing operations. Moreover, demonstrating malicious intent is challenging, and prolonged legal proceedings are costly. Finally, companies are reluctant to disclose information about their knowledge-protection practices or admit to being a victim of predatory actions, given that doing so may harm the company’s reputation in the eyes of shareholders and other prospective partners.
Not all IP leakages involve illicit activity such as outright knowledge theft or breach of contract.
References
1. Office of Public Affairs, “Chinese Company Sinovel Wind Group Convicted of Theft of Trade Secrets,” U.S. Department of Justice, Jan. 24, 2018, www.justice.gov.
2. S. Bengali, “Fraud Charges, Lost Patents: How an LA Auto Legend’s China Venture Crashed,” Los Angeles Times, Aug. 13, 2020, www.latimes.com.
3. J.-C. Friedmann, D. Lavie, and L. Rademaker, “Does the Predator Become the Prey? Knowledge Spillover and Protection in Alliances,” Journal of Management, published online July 31, 2024.
4. For an analysis of how staffing decisions affect IP leakage, see N. Palomeras and D. Wehrheim, “The Strategic Allocation of Inventors to R&D Collaborations,” Strategic Management Journal 42, no. 1 (January 2021): 144-169.
5. For a discussion of the Renault-Nissan alliance, see R. Burgelman and S. Leslie, “The Renault-Nissan Alliance in 2008: Exploiting the Potential of a Novel Organizational Form,” Stanford Graduate School of Business case no. SM166 (Stanford, California: Stanford University, 2008).
6. B. Spillman, “It’s Big, Loud, and Secretive: We Got a Tour of Tesla’s Gigafactory and Here’s How It Works,” Reno Gazette-Journal, Dec. 10, 2018, www.rgj.com.
7. For a discussion of anti-reverse-engineering techniques, see D. Sharapov and S.C. MacAulay, “Design as an Isolating Mechanism for Capturing Value From Innovation: From Cloaks and Traps to Sabotage,” Academy of Management Review 47, no. 1 (January 2022): 139-161.
8. For insights into deliberate leaks, see D.R. Hannah, I.P. McCarthy, and J. Kietzmann, “We’re Leaking, and Everything’s Fine: How and Why Companies Deliberately Leak Secrets,” Business Horizons 58, no. 6 (November-December 2015): 659-667.
9. E. Hardy, “Apple Busts Major iOS 17 Leaker With Spycraft ‘Canary Trap,’” Cult of Mac, May 10, 2023, www.cultofmac.com.