Google v. China – Just What in the World Is Going on over There?

By Patrick S.

Recently, there has been significant coverage in the news about Google, and other Western companies, and their problems in China. Much of the recent coverage has been driven by Google’s January 12th, 2010 blog posting that it had been the victim of a "highly sophisticated and targeted attack on our corporate infrastructure originating from China." Google's problems with respect to this issue were so severe that it resulted in a full blown diplomatic dispute between the U.S. and China. The US government has stated that Google's allegations against China "raise very serious concerns and questions [and] we look to the Chinese government for an explanation. . . [t]he ability to operate with confidence in cyberspace is critical in a modern society and economy." In response to this and related US criticism, the Chinese government has, either directly or indirectly, provided sharp and highly critical anti-US responses. An example of such a response could be found in the Chinese state-sponsored newspaper (The Global Times), which quoted a Chinese analyst as calling Google’s complaint “a U.S. government-initiated strategy with covert political intentions . . . [and that] [a]s the global landscape is undergoing profound irreversible shifts, the calculated free-Internet scheme [advocated by Google] is just one step of a U.S. tactic to preserve [the U.S.'s] hegemonic domination.” As for Google, after first attempting to resolve its differences with the Chinese government, it has now moved forward with its “doomsday scenario” and formally exited China - no small feat for a publically-listed multinational corporation under tremendous pressure to grow its market-share and revenues.

So, one might ask: just what is all this rancor about? Unfortunately, this is not an easy question to answer. In reality, there are many reasons for Google's concerns with the Chinese government including censorship of Google’s search results and the Chinese rule of law with respect to protection of intellectual property. The focus of this brief commentary will be on Google's concerns related to Chinese violation of Google's most valuable asset - its intellectual property.

Google appears to be claiming that, either directly or indirectly, China (and/or its citizens) played a role in allowing, encouraging or tolerating computer "hackers" to break into Google's IT system and illegally perform a number of actions. Of significant concern to Google (and approximately 30 other western-orientated companies, such as Adobe Systems) was the hackers apparent attempts to access and steal intellectual property, including the Company's most valuable asset - its source code, which is defined as the means most often used by programmers to specify the actions to be performed by a computer. Google’s top-of-the-line search methodology, for example, is powered by patented source code developed by the Company’s two founders, Larry Paige and Sergey Brin.

For a Company such as Google that lives or dies by its proprietary source code, this is a crucial issue. More than anything else, Google is a Company that, through its self-created computer programs (i.e. source code), analyzes user-input search terms, retrieves what it believes to be the most relevant result across the world wide web, and quickly presents that data to the end-users. Google's effectiveness and skill at doing this has allowed it to gain the greatest market share in search-related advertising revenue, and provided the Company with billions of dollars in revenue each year. As such, the processes by which Google performs these activities are highly confidential and valuable.

From a U.S. legal point of view, Google's methods and processes for analyzing user-input search terms would be considered a proprietary trade secret. For instance, Section 1(4) of the Uniform Trade Secrets Act defines "trade secret" as "information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Court cases from across the U.S. that have considered the issues related to trade secrets have offered significant protection to persons or companies that have invested in and created such trade secrets. For instance, in US West Communications, Inc. v. Office of Consumer Advocate, 498 N.W.2d 711, 714 (Iowa 1993), the Court held that "[t]rade secrets can range from customer information, to financial information, to information about manufacturing processes to the composition of products. There is virtually no category of information that cannot, as long as the information is protected from disclosure to the public, constitute a trade secret. We believe that a broad range of business data and facts which, if kept secret, provide the holder with an economic advantage over competitors or others, qualify as trade secrets." In another opinion, a U.S. Court provided even greater potential protection to those creating trade secrets, holding that, in essence, anything which provides its owner with a competitive advantage can qualify as a trade secret if it is appropriately guarded as such. Prince Mfg., Inc. v. Automatic Partner, Inc., 191 U.S.P.Q. (N.J. Super. Ct. Ch. Div. 1976).

Because of this, under general U.S. legal standards, Google could expect its computer source code / programs /processes to be legally protected. Part of the controversy between companies like Google and China is that western-orientated firms are finding that China may not fully respect western-style intellectual property laws, thus putting companies - like Google - that exist only because of their intellectual property, at great risk. As increasing numbers of western-oriented businesses expand into China due to its large domestic consumer market, manufacturing base, and growth potential, firms such as Google are finding that they may be faced with a lose/lose type of decision: either pull-out of China and ensure protection of their intellectual property but lose out on the tremendous market share growth the market offers, or put the Company's intellectual property at risk but enjoy revenue and market share growth. For companies that rely on the protection of their trade secrets to survive and grow, a country's failure to respect the sanctity of intellectual property could, as Google has shown, be a deal breaker. Whatever the growth benefits of investing in China are, if the country will not vigilantly protect foreigners’ intellectual property and trade secrets, companies will increasingly think twice about investing there - to the detriment of China and western Companies. Further, in some cases, firms already invested in China may decide, as Google did, to pack up and leave.