Two former Eli Lilly scientists were arrested and charged by the U.S. Government for stealing and transmitting Lilly trade secrets to a Chinese company.  Guoqing Cao and Shuyu Li, both research scientists with doctoral degrees, have been charged with multiple counts of trade secrets theft and conspiracy in violation of 18 U.S.C. Sections 1832 and 371, according to an Indictment that was recently unsealed by the U.S. Attorney’s Office in Indianapolis.  The charges against the two naturalized U.S. citizens, who will remain in custody for leaking trade secrets to a Lilly competitor in China, provides an abject lesson for both pharmaceutical companies that fail to safeguard trade secrets and other proprietary information and employees who get caught by federal authorities.

Background

Cao and Li allegedly used email to pass along reams of proprietary information relating to nine of Lilly’s experimental drug research programs to a person identified in the Indictment as “Individual #1″, who at all relevant times was an employee of Jiangsu Hengrui Medicine Co. Ltd., a rival drug company based in Shanghai.  Cao, who delivered information related to “Trade Secrets 1-3″ to Individual #1 while still with Lilly, enlisted Li to provide him with information related to “Trade Secrets 4-9″ after he left Lilly to join Hengrui.   The trade secret information, which may be worth up to $55 million, was most likely  delivered to the Chinese drug company to help it reproduce Lilly’s research.

“We are appalled and very disappointed by the crimes allegedly committed by these former Lilly employees,” Eli Lilly General Counsel Michael J. Harrington said in a statement. “Theft of Lilly’s confidential information harms Lilly by depriving the company of the value of its costly research efforts while giving unfair competitive advantage to others.”  Lilly assisted the FBI and the U.S. Attorney’s office in the investigation of Cao, Li and Individual #1, according an Indianapolis Business Journal article published on Oct. 8.

At the defendants’ detention hearing, Lilly’s head of global product development testified that the misappropriated information related to early-stage clinical development of potential new drugs that would treat cardiovascular disease, diabetes and cancer.  Given the Chinese-born defendants’ ability and incentive to flee to China if granted bail, the Government successfully argued that the two should be detained pending a trial on the charges.  Likening the actions of Cao and Li as a “crime against the nation,” one federal official argued that “traitor,” summed up the Indictment in one word.  (Not surprisingly, a defense attorney offered a different one-word rejoinder to the Government’s remark, characterizing the Indictment as an “overreach”).

Observations

Pharmarisc readers will recall that last April we reported on a trade secret suit between Gilead and Vertex in a post titled “The Importance of Keeping (Trade) Secrets” in which we underscored

how important it is for pharmaceutical and other life science companies to protect their trade secrets and other highly valuable intellectual property [and that] . . . companies that are not careful about their trade secrets and other proprietary information can find themselves on the wrong side of a lawsuit or even a criminal referral to the Federal Government.  Recent case law confirms not only that pharmaceutical companies are prime targets for trade secret theft (both foreign and domestic), but underscores the need to regularly reassess the adequacy of a company’s firewalls for safeguarding intellectual property, such as trade secrets, and other proprietary information.  The risks of not doing so can be severe and can include millions of lost dollars in research and development and an even greater loss in competitive advantage.

The Indictment against Cao and Li and the damage done to Lilly’s R&D program and investment, though estimated at $55 million, could be even greater if Hengrui is able to develop competing products in China and elsewhere.   The silver lining for Lilly — and for life science companies refining their trade secret firewalls — is that Lilly’s efforts at safeguarding its proprietary information were recognized by the Government as “reasonable,” which meant that the misappropriated information was effectively cloaked under the “trade secret” banner.  Those efforts included limiting physical and card reader access to Lilly’s U.S. and China campuses; requiring employee confidentiality agreements; recurrent training and instruction on safeguarding proprietary and trade secret information; limiting use of confidential information on a need to know basis; limiting access to Lilly  computer networks; maintaining data security banners and policies; and requiring authorization to discuss Lilly’s proprietary information outside the Company.  (For more information on how to strengthen a company’s safeguards against trade secret theft, click on the link to my article on “How New Trade Secret Legislation Impacts Pharma Compliance Programs,” published by Pharma Compliance Monitor on March 29, 2013).  While Lilly’s efforts didn’t prevent Cao and Li from allegedly stealing the Company’s trade secrets, the good news is that even minimal steps are sufficient to convert proprietary information into a “trade secret.” Perhaps more importantly, federal prosecutions of trade secret theft should deter others in positions similar to Cao’s and Li’s from considering such a crime in the future  — and deterrence may ultimately provide a company like Lilly with the last and best firewall of all.