In the Gizmodo/iPhone prototype story, the journalism shield law is the side salad; the main meal is the revelation of trade secrets and how they were obtained

What do these names mean to you?

Chana, Dongfeng, Zotye, Gonow, Roewe, Hawtai, Lifan, Chery, Geely and BYD

Not much perhaps…

But if you’re on the Boards of Ford, Chrysler, General Motors or Honda, all of whom manufacture motor vehicles in the USA, you know these names very well, and they worry you.

You see, they are all Chinese auto manufacturers preparing to export their vehicles to the West and give local brands a run for their money. Geely, for instance, now owns Volvo. BYD is one of the largest auto manufacturers in the world. And already on local Aussie television, I am seeing advertisements for Great Wall Motors 4WD, passenger and utilitarian vehicles (see advertisement below). These are often two-thirds of the price of local vehicles, but if they come with a three year warranty at the same price as a used well-known vehicle…

GM, which required US tax payers money to bail it out, has opened a major factory in China in an effort to reverse the import drain and find a profitable presence in the Chinese economic powerhouse.

Western companies face a major dilemma when it comes to competing with the Chinese. They manufacture there in order to keep costs down, and it’s likely that the computer you’re using to read this blog may have been designed in the US, but it will have been manufactured in China. The Chinese, like the Japanese before them, are becoming master emulators, reverse engineering US designed goods to a quite high specification.

China is already building its own commercial passenger jets, having been a major Boeing and Airbus purchaser for a decade now, with a huge and growing internal marketplace for civil aviation. It’s using home-grown R and D, plus the purchase of American know-how from household names, like GE. For years, Chinese companies have manufactured elements of Boeing 737s, and are also involved in the new materials 787, currently being tested for certification for first deliveries next year.

And therein lies the dilemma: Use cheap Chinese labour to maintain profitability in the short term while waiting for the Chinese to develop their own products to compete with the West in the long term. And guess how the Chinese will develop the knowledge to become competitors for American products? From their building American products for American corporations plus their own home-grown R and D plus the purchase of American know-how.

If the US has one great advantage over the cheap labour of the East, it’s the ability to innovate, to stay an intellectual step ahead of its competition.

Companies like Apple, which design both the software and hardware for its products, show what happens when you control the whole widget because as its increasing sales quarter after quarter shows, it’s a very hard act to emulate. But to maintain that level of emulation difficulty requires secrecy and strategising over a number of years of a product’s being brought to market. It’s part of Apple’s DNA, given how the emulation of its core OS features that made a Mac a Mac was “emulated” by Microsoft after Steve Jobs gave Bill Gates a Mac for software development.

So when Apple’s intellectual property is made visible to the world not as the finished product for sale, but in an effort to scoop other web-based publications which could allow competitors several months head start to ramp up their copying, Apple no doubt sees it as a threat to its ability to conduct business its way. We’re not talking about some pissant backwater low-tech company, but a major US corporation which has been a financial powerhouse in recent years of overall poor US financial performance amidst questionable ethical behaviour by leading corporations.

If some disaffected employee, recently fired from Apple, had decided to visit Gizmodo and spill his guts in breach of his NDA, and Gizmodo had decided to publish that information, that’s one thing, which may have its own legal consequences for both parties to the publication.

But in the iPhone case, we’re not just talking about a seemingly nice young man who probably should have done more to return the iPhone to its owner (the guy who brought it into the bar), according to his own lawyer in a statement that one tends to hear after a guilty plea has been entered in order to mitigate a sentence (I mean, the 21 year old who found it has not been charged yet and his lawyer is almost rolling over with pleas for clemency). We appear to be talking about hawking about the place, property of a sensitive nature to the highest bidder once its uniqueness became known, and an effort was made to place a value on that uniqueness. The iPhone prototype is not unique; there are probably dozens of them in Apple employee hands doing exactly what Gray Powell was doing: roadtesting in the wild according to the usual pre-production plans and strategies (although after this security breach, Apple may have gone to Plan B for its road testing). What made his iPhone unique was it was the first device which found its way into the hands and onto the pages of a technology-based website without Apple’s consent.

That it found its way there through dubious, and likely illegal means (the latter of which will shortly be tested), is but one part of the story as is the reports of  “breaches” of California shield laws in the seizure of Jason Chen’s computer equipment which has the journalism world spending much time navel gazing. But from this distance, it’s the exposure of trade secrets which I believe is uppermost in Apple’s corporate mind, and will eventually see a civil suit brought against Gizmodo, with the criminal law enforcement officials looking at the issues surrounding the iPhone’s non-return in the first place, including Jason Chen’s and Gawker Media’s involvement.

Consider this: What if the finder and his associates in their hawking the iPhone had turned it over to someone purporting to be a mainstream website, but who in the exchange of money for the iPhone turned out to be the representative of a far-east manufacturing facility with the means to quickly reverse engineer and begin the manufacture of thousands of such phones, which could take Apple months if not years to halt production and selling through legal avenues? Not in the US where of course it could bring an order for their immediate non-importation. I’m talking of the Asian and sub-Asian continent where billions of dollars of counterfeit US-designed products have already flooded the market.

So, yes, let’s have a little fun at Apple’s expense via The Daily Show (who as funny as it may have been in asking Steve Jobs for some personal time on Camera 3), but let’s not obscure through mirth and omission of salient facts the seriousness of what’s occurred. While journalists, pseudo-journalists and lawyers can blather on about the protection of rights, such as who is a journalist as in this meandering “think piece”, there is a bigger question at stake about the levels of protection against the plundering of intellectual property US citizens are willing to tolerate.

Let me put what’s happened another way, similar to the car analogy in my previous blog entry, which seemed somewhat convincing to many readers.

The son of a very senior industrial chemist who happens to work in Atlanta for Coca-Cola quickly needs to make a copy of last night’s Daily Show with Jon Stewart to give to a friend he’s meeting in a downtown bar. He enters his father’s study, and removes a USB thumbdrive from his father’s draw, where he knows quite a few are kept, complete with Coke logo. He takes it back to his PC, copies the video file, and tells his friend to meet him where he’ll give him the USB drive.

They meet, the USB drive is handed over with the promise it will be returned next time they meet. The friend later lends the same drive to another friend with the Daily Show and now a copy of this week’s Lost on it, and the friend who happens to be studying chemistry at Berkley discovers on the USB a text file with a chemical formula. He figures it’s the formula for a possible new version of Coke. (Silly Coke chemist for having such vital data sitting in his study drawer). What should the person do? What would you do?

Do you take the story to the New York Times, and ask for $5000 to send them the stick, having perhaps sent them some of the formula for them to have it verified by experts? Do you ring up Coca-Cola? Do you retrace the USB stick’s chain of ownership, perhaps more likely if you’ve been following the Gizmodo situation. Do you wipe the stick? Do you publish it on Facebook? Do you perhaps take it to Pepsi? Or do you locate a cola manufacturer in a foreign country and begin negotiations, knowing that millions of dollars are at stake, and thousands of US jobs?

I mean, it’s Coke after all. They don’t make defibrillators, anti-depressant medication, commercial jets, or anything truly meaningful other than sugar water, if you’ll pardon the historical pun. What community harm can be done?

Enough with the rhetoric. The more this situation goes on without Jason Chen/Gizmodo either being charged, subpoenaed or having his equipment returned, the more it turns into the old familiar Apple fan versus Apple hater soap opera, with a side-dish of who’s a journalist and what rights do they have, and the true potential harm is obscured. And perhaps that’s something Apple is happy to do, until they reveal it on their own terms in a civil action.

UPDATE: As I was composing this blog entry, a US friend sent me a media release from the United States Attorney’s Office for the central district of California regarding a matter where a UCLA medical researcher, having been terminated, looked into the medical records of his supervisor’s patients, including some well-known celebrities, in breach of the HIPAA. Below is part of the media release, important because this is the first instance of incarceration for a breach of the privacy provisions of HIPAA – ie., just for looking, not even on-selling to the media.

Moral of the story: Some things are simply meant to be taken seriously, even where there appears on the surface to be no victim or harm done, if you choose to look at it that way. Which is the wrong way, as it turns out:

A former UCLA Healthcare System employee who admitted to illegally reading private and confidential medical records, mostly from
celebrities and other high-profile patients, was sentenced to four months in federal prison.

Huping Zhou, 47, of Los Angeles, was sentenced by United States Magistrate Judge Andrew J. Wistrich, who condemned Zhou for his lack of
respect for patient privacy.

Zhou pleaded guilty in January to four misdemeanor counts of violating the federal privacy provisions of the Health Insurance Portability and
Accountability Act (HIPAA).

Zhou specifically admitted to knowingly obtaining individually identifiable health information without a valid reason, medical or otherwise.

Zhou is the first person in the nation to be convicted and incarcerated for misdemeanor HIPAA offenses for merely accessing confidential records
without a valid reason or authorization.

Zhou, who is a licensed cardiothoracic surgeon in China, was employed in 2003 at UCLA Healthcare System as a researcher with the UCLA School of

On October 29, 2003, Zhou received a notice of intent to dismiss him from UCLA Healthcare for job performance reasons unrelated to his
illegal access of medical records.

That night, Zhou, without any legal or medical reason, accessed and read his immediate supervisor’s medical records and those of other co-workers.

For the next three weeks, Zhou’s continued his illegal accessing of patient records and expanded his illegal conduct to include confidential
health records belonging to various celebrities.

UPDATE: MAY 3 – Lawyer and blogger Peter Scheer, who is also Executive Director of the First Amendment Coalition, has a well-reasoned article in this weekend’s Huffington Post, entitled “Strip-searched: Lost iPhone probe shows why search warrants should never be used on journalists”.

It puts the California Shield laws at the centre of this story, whereas I see it as almost a red herring. But as a non-US citizen, I am not as steeped in First Amendment lore (and law) as someone like Scheer. Do read his article; it’s well written. (Although when you get to the section on how a person’s life would be turned upside down if their servers would be removed you’d wonder about issues of backing up essential items for work continuity. And you’d also wonder if perhaps secret information sources might be just a tad perturbed by the actions of Gizmodo and Jason Chen prior to the seizure warrant being issued, such as when they went very public with their iPhone story. If it was me, I would have mailed them to destroy all email correspondence because I considered a raid was imminent.)

One response to “In the Gizmodo/iPhone prototype story, the journalism shield law is the side salad; the main meal is the revelation of trade secrets and how they were obtained

  1. I really love this blog… Such great posts all the time!

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