Corporate Espionage — The Stuff of Company Playbooks

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Corporate Espionage — The Stuff of Company Playbooks

By Jennifer Williams-Alvarez December 2, 2019

Sending in impersonators to glean what competitors are developing. Instructing employees on how to spy on the competition. Tailing former employees and their families.

These are among the allegations of scrofulous behavior made against Mattel that emerged in high-stakes litigation pitting the toy giant behind the Barbie empire against MGA Entertainment, the owner of the Bratz dolls. The two companies were fighting over intellectual property — and more specifically the question of which was the rightful owner of Bratz, the popular and edgy counter to Barbie’s prim-and-proper demeanor. But as the battle waged on and executives like Mattel’s former chairman and CEO Robert Eckert testified, the picture exposed was of a company that used any means necessary to keep its foothold in the market, says Isaac Larian, MGA’s chief executive officer.

“This situation with Mattel was incredible, because they were promoting themselves as the most honest company and the most reliable company,” he says. Then, in the course of litigation, it was revealed that Mattel had an 11-page manual advising employees on how to steal competitors’ confidential information, Larian says. The document, produced as part of the lawsuit, suggested creating fake business cards, for example, to gain access to the private showrooms of MGA and other toy makers.

As shocking as that revelation was, “it became more than that,” Larian says, pointing to the experience of an employee named Ron Brawer, who jumped ship from Mattel to MGA in 2004.

“What we found out, which was appalling … was they had followed Ron Brawer, his wife, his three-year-old daughter, his seven-year-old son. To baseball games, to supermarkets, vacations,” Larian says. “Videotaped the whole thing.”

(Ron Brawer and family depicted in surveillance videos.)

These were practices that implicated those at the highest levels of the company, either because the individuals were active participants in the conduct or should have been aware of it, according to Larian.

The hard-fought battle between Mattel and MGA exposed tactics used by the toy giant to snuff out any company that posed a threat to Barbie’s reign in the doll space. But Mattel is not alone in being accused of using unsettling practices in the name of business.

The issue recently came to the fore at Credit Suisse, related to surveillance of a wealth manager who had moved to a competitor, a scandal that brought questions to the board about whether top executives were properly informed about what was going on in the company. Wynn Resorts, Oracle and HP are just a few additional companies that have similarly come under the microscope for such conduct. Related occurrences involve the likes of corporate spies chasing a former employee through the streets of Zurich, digging through a competitor’s trash and monitoring board members’ communications.

At one end of the spectrum are actions that venture into illegal territory, such as invading someone’s privacy, while at the other is the common practice of monitoring employees to thwart the theft of proprietary information. Somewhere in between is the sometimes-seedy gray area that, while not necessarily illegal, can cast companies in a harsh light.

If they venture into the issue at all, board members tend to find themselves in discussions on the more palatable end of corporate monitoring, directors tell Agenda, talking or hearing about efforts related to garden variety intellectual property and cyber-security protection, for instance. Were it to escalate to a situation that had the potential to tarnish a company’s brand, though, directors should know about it, according to John Bryant, former chairman and CEO of Kellogg Company and current director at Macy’s.

“I would not expect to be informed of routine monitoring to protect the company’s assets/maintain a cyber-secure environment,” he writes in an e-mail. “However, if the company were engaged in monitoring that would harm the company’s reputation if it became public knowledge, then I would expect to be made aware.”

He adds, “Clearly there is a judgment call here,” explaining that as “a board member, there is no way for me to know about inappropriate surveillance unless management informs the board.” With well over a decade of experience in C-suite and board roles, Bryant says he has never been involved in an inappropriate surveillance program or in conversations about the physical surveillance of employees or competitors.

Laughing Plastic

The legal trouble between Mattel and MGA revolves around the Bratz dolls and the designer behind them, Carter Bryant. In 1995, Bryant was hired by Mattel, where he worked off and on as a doll clothing designer over a period of roughly five years. During this time and while, Bryant contends, he was not on Mattel’s payroll, he came up with the concept for the Bratz dolls — a group of “multi-ethnic, urban youth” in doll form that were “dressed in trendy fashions” and had “bratty” attitudes, according to court filings. Though Bryant did go back to Mattel after having the “eureka moment,” he suggests in court filings that he never shared Bratz-related sketches with Mattel, and the idea was eventually shopped out to and scooped up by MGA.

Released in 2001, the Bratz dolls were a hit and the first to successfully challenge Barbie’s popularity.

Mattel’s response was to sue Bryant for unjust enrichment and breach of contract, among other claims. Mattel also sued MGA. And MGA sued Mattel. The ensuing legal battles wove through state and federal courts, resulted in eye-popping verdicts only to be overturned on appeal, and ultimately uncovered strategies Mattel deployed to keep a competitive edge. The federal court case was resolved in 2011, after months of testimony and more than a week of jury deliberations, with Mattel initially ordered by the court to pay hundreds of millions of dollars. Trade secrets theft claims were separated from that litigation and pursued in state court.

Throughout the litigation, the details that emerged about Mattel’s surveillance and spying on rival toy makers were “crazy,” says Larian.

Through its market intelligence department, Mattel used deceptive practices to gain access to the showrooms of its competitors, including MGA, Hasbro and Sony, according to a 2010 court filing. This was allegedly an ongoing scheme that lasted for at least 15 years, MGA alleged, and it involved suggested practices such as printing up fake business cards to gain entry to the very guarded showrooms that are typical of the toy industry.

Always use your own name. Use your home address. “You can either put down your home phone or make up a fake number. Just don’t put down your Mattel number.” These were among the tips included in the so-called “how to steal” manual that MGA alleged was internally distributed at Mattel.

“It didn’t cross my mind or anybody’s mind that a big public company would do something like this,” Larian reflects. “This was just, oh my God, this was just mind-boggling.”

Similarly unsettled by the practice was former Mattel employee Sal Villasenor, who was once in charge of the company’s market intelligence department. After nearly 15 years at Mattel, Villasenor sent an e-mail in December 2005 to legal and human resources representatives, including to then general counsel Robert Normile, describing his work conditions as “intolerable.”

“I no longer wish to engage in misrepresentations and undercover assignments in which I am paid by Mattel to attend trade shows and events. I fear that my actions may expose me to personal criminal liability and I am stressed about the fallout, which may occur,” Villasenor wrote. “My conscience does not allow me to continue in this role and I do not feel I can take the pressure to engage in misrepresentations any longer.”

However, questions remain about how much Mattel’s leadership knew about the market intelligence group. For example, Mattel’s then-CEO Eckert claimed in depositions that he had no prior knowledge of it and that there would be no valid reason for Mattel employees to deceptively gain access to competitors’ products. Then when he took the stand in April 2011, MGA lead counsel Jennifer Keller asked whether it was true that nothing had been done to investigate whether deceptive practices were occurring or to hold individuals to account. “That’s correct,” Eckert responded, indicating both that he considered questions posed during depositions as describing hypothetical scenarios and that he was confident it was being investigated, even if not at his urging.

In fact, those involved in or aware of this practice were promoted and given bonuses, Eckert said in response to questions from Keller, currently an attorney at California law firm Keller/Anderle. In the
same testimony, Eckert said he did not believe the market intelligence group continued to exist. A Mattel spokesperson did not comment on the continued existence of the group.

And then there was surveillance. Larian says he believes investigators tailed his son while on his skateboard. Then 11 years old, Larian’s son had told him that a big car was following him. “I didn’t believe it until I saw it with my own eyes,” Larian says. “And sure enough, we took the license plate and tracked it down, and it was a private investigator hired by Mattel.”

“It was really kind of scary,” the MGA CEO reflects. “You think you’re in the toy business and everything is fine and dandy and nice, but it’s crazy.”
What the jury would eventually see were instances in which Brawer and his family were surveilled. Brawer took Mattel documents as he was departing to go to MGA, according to Eckert’s testimony. He had been in contact with the competitor for some time and argued on his way out that the company’s code of conduct didn’t apply to him, “so I can imagine why someone would want to know what Ron Brawer was doing,” Eckert testified, adding, however, that prior to early 2011, he didn’t know the surveillance extended to Brawer’s family.

Before the footage was played, and out of the presence of the jury, U.S. District Judge David Carter took time to address Larian and Eckert. “I’ll put on the record that I hold both of you gentlemen absolutely responsible for your various employees … the buck stops with each of you,” Carter said. “And I don’t care whether you’ve got five employees or five million employees.”

A short clip was then played for the jury that pulled from “many days” of surveillance. Keller put it to Eckert to declare whether there is any legitimate reason to videotape Brawer’s family. “On its surface, it doesn’t make sense to me,” he responded. “I’d want to know why somebody thought it made sense to them.”

Eckert then acknowledged he would find it “disturbing” if his own wife and kids were surveilled related to the decision to go work for a competitor.
Counsel for Mattel made the case to jurors that Carter Bryant’s move to MGA with the Bratz dolls in tow sparked a transformational period for MGA. Larian’s company had declared bankruptcy in the late ’90s and was subsequently struggling to produce profits when the company seized upon Bryant’s fashion dolls with attitude, the attorney said.

Mattel’s attorney further characterized the market intelligence practices — creating fake business cards to gain access to competitors’ information — as “an unsavory way of getting public information” but “not remarkable.”
Ultimately, after the jury determined a damages award owed to MGA in April 2011, the court amended it, and on appeal, Mattel was ordered to pay more than $130 million in attorney’s fees and costs to MGA.

Potentially ongoing in the more than decade-long legal battle is the separate trade secret theft lawsuit in California state court. Larian alleged in a press release tied to the 2014 suit that “[r]ather than competing fairly in the marketplace, Mattel’s executives chose to engage in thievery, industrial
espionage and fraud.” A district court dismissed the case in February 2018, and a state appeals court refused to revive the case in October of this year. Larian tells Agenda that the company is “seeking review” from California’s Supreme Court.

“This is a fight that Mattel wrongfully started in 2004,” Larian says. “We are confident that this is an issue the Supreme Court will want to address and that our position will ultimately prevail.”

Eckert, who retired as Mattel’s CEO in December 2011, declined to comment. Normile, the former GC, who is described in court filings as being “apprised” of the market intelligence group’s efforts by no later than the end of 2005, remains at Mattel and has been promoted to chief legal officer. He did not respond to request for comment. A Mattel spokesperson said in a statement that at “no time has Mattel’s Chief Legal Officer condoned any kind of spying on any competitor.” The spokesperson did not comment on the record in response to a number of questions, including whether these practices continue.

Beyond Barbie

It has been years since the jury largely sided with MGA and even longer since allegations about Mattel’s business tendencies began to show up in court filings. But while clandestine business practices like those alleged in the Mattel litigation may be relatively rare, they are not obsolete in the business world. Just this year, a number of large public companies have been wrapped up in similar scandals.

At Wynn Resorts, claims arose at a hearing before gaming regulators stemming from the allegations against former CEO Steve Wynn that the company had surveilled co-founder and major shareholder Elaine Wynn and others. Former executive VP of corporate security James Stern, who left the company shortly after the hearing this year, testified that he had hired former FBI agents to conduct the surveillance. And then in October, a former Wynn Resorts salon employee, Jorgen Nielsen, filed an invasion of privacy lawsuit against Wynn Resorts, CEO Matt Maddox, former top lawyer Kim Sinatra and Stern claiming that Wynn Resorts insiders “approved a secret undercover operation against” Nielsen. The operation, according to Nielsen, involved sending an undercover person into a non-Wynn salon in March 2018, months after the allegations against Steve Wynn came to light in a Wall Street Journal article in which Nielsen was a named source.

Wynn Resorts, which through a spokesperson declined to comment, fired back in a court filing that Elaine Wynn orchestrated Steve Wynn’s ouster by steering reporters toward sexual misconduct claims and that she did it with the help of Nielsen. On the issue of surveillance, the company claims that what occurred was Nielsen spoke to a customer who was allegedly undercover. No one lied to Nielsen, gained access to a private location or gathered private or harmful information, the filing reads.
Stern’s counsel say in an e-mail statement provided to Agenda that, consistent with Stern’s “military and law enforcement background, his conduct completely conformed to his lawful responsibilities as the Corporate Security Director.”

At Credit Suisse, meanwhile, news of corporate espionage roiled the company as details emerged about surveillance of former executive Iqbal Khan, who defected to a competitor. The surveillance operation escalated until Khan and his wife were chased through the streets of Zurich by private investigators. One Credit Suisse executive resigned in the wake of the scandal. Another person involved committed suicide.
This, as the results of an internal investigation were released by the company’s board indicating that the surveillance had not been disclosed to directors and CEO Tidjane Thiam nor had Thiam approved of the spy operation.

The bank’s board acknowledged in a press conference that it was “wrong and inappropriate” that surveillance of Khan was ordered, and it addressed concerns that Thiam was apparently unaware of such measures. “I don’t believe in my own mind, speaking as a board member, that that suggests that Mr. Thiam is not on top of the rest of the organization,” audit committee chair John Tiner said at the October press conference. “I think that this was … a highly irregular and unusual act. And that form of taking responsibility for something so significant as this without escalation is a highly exceptional occurrence in Credit Suisse.”

Bruce Sewell, director at Vail Resorts and at privately held technology company, draws a distinct line between what is appropriate and what’s not in the name of corporate security. For “legitimate reasons,” companies surveil employees if they reasonably believe their behaviors might harm the company, says Sewell, former senior vice president, general counsel and corporate secretary at Apple. “On the other hand, I think using corporate assets to surveil your chairman’s wife for purposes to facilitate a divorce or purposes that are not corporate issues, for example, then I think that’s an issue.”

“That seems to be a misuse of corporate assets,” he says, adding that, while he has not been involved in such situations, “they certainly do come up.”
To be sure, the secretive nature of this activity likely means those outside a corporation and many within are often unaware of how companies protect assets, says Orly Lobel, professor of labor and employment law at the University of San Diego School of Law. “But I think we do have a sense that there has been a rise in these kinds of practices,” she says.

And when the circumstances are exposed to the public, “board members and executives deny they knew it was going on,” explains Lobel. “Sort of, ‘an employee went rogue’” kind of explanation.

There are unlawful practices, there is standard e-mail monitoring, and then there is the gray area, which can include practices like digging through a competitor’s garbage, says Lobel. “I think that companies often slip into that gray area with a thirst to hold on to their competitive edge.”
Larian describes it as “horrible” for company culture to implement security practices that venture into the gray areas or worse. “People caution me and say, ‘Isaac, you’re too naïve.’ But I don’t think we’ve got to go to the point of paranoia to monitor people,” he explains. Who wants to work in an environment where the sense is that “Big Brother is watching?” Larian asks rhetorically.

For companies that utilize nefarious practices, Larian speculates that directors would have some awareness of it.

“I think boards know what the hell is going on.”

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