Nippon Steel vs POSCO: Lessons in Tech Leak Defense
Mar 16, 2026UP!
- Blog
- Corporate Governance
- Economic Security
- IP Strategy
- Nippon Steel
- POSCO
- Technology Leak
- Trade Secrets
1. Why Did Nippon Steel Hold Such a Technological Edge?
The answer lies in grain-oriented electrical steel (GOES) — a proprietary technology it pioneered. This material, often called an “artwork in iron,” dramatically reduces energy loss in transformers and other equipment. Nippon Steel (then Nippon Steel Corporation, NSC) commanded a dominant share of the global market. In the 1960s, Japan’s steel industry led the world. Nippon Steel began developing electromagnetic steel technology in 1961, and by 1968 had achieved the world’s first mass production of grain-oriented electrical steel. By controlling the crystalline grain structure of iron through proprietary rolling and heat-treatment processes, the company dramatically reduced energy losses in transformers and generators. The core of the technology lay in an enormous body of know-how: crystal orientation control, heat treatment parameters, rolling conditions, and much more. Because patenting would have required public disclosure, Nippon Steel deliberately chose to keep the technology secret rather than patent it — managing it as a trade secret under strict internal controls.2. Why Did the Technology Leak Happen?
The collapse of lifetime employment and inadequate reward structures for engineers were among the root causes. Throughout the 1990s, the exodus of skilled Japanese engineers to foreign companies accelerated. South Korea in particular, driven by state-led industrial policy, routinely recruited retiring Japanese engineers with generous compensation packages. POSCO is believed to have recruited former Nippon Steel engineers in the late 1990s to acquire GOES manufacturing know-how. Behind this lay structural failings at Japanese companies. The absence of performance-linked compensation eroded researcher loyalty. A 2020 survey confirmed that 36.3% of trade secret leaks were caused by departing employees. In other words, the leak was not merely an act of betrayal — it was a structural inevitability.3. How Was the POSCO Incident Discovered?
The trigger was testimony during a separate trial, in which a former POSCO employee admitted disclosing confidential information to a Chinese company — adding that the technology had originally come from Nippon Steel. POSCO’s product quality rose rapidly in the early 2000s, and by 2004 the company had reached a 20% global market share. Nippon Steel grew suspicious in 2007: such rapid quality improvement seemed unnatural. That same year, during a criminal trial against a former POSCO employee accused of illegally disclosing the company’s own trade secrets to China’s Baosteel, the witness stated that the underlying technology had originated at Nippon Steel. This testimony became the starting point of the entire case. In April 2012, Nippon Steel filed suit against POSCO and its Japanese subsidiary, POSCO Japan, in the Tokyo District Court. The claim sought ¥98.6 billion in damages and an injunction against manufacturing and sales. Notably, at the time of filing, the two companies still maintained an active technology alliance concluded in 2000 — revealing that corporate espionage had been conducted beneath a surface of international cooperation. In September 2015, the parties reached a settlement in which POSCO paid ¥30 billion. Nippon Steel announced it had “achieved its objectives to a satisfactory degree.” In reality, however, it had been unable to fully prove the trade secret infringement. Three reasons explain this:- ① Under Japanese law, the burden of proving adequate secret management falls on the victim company.
- ② Evidence of information taken abroad through departing employees is nearly impossible to gather.
- ③ The prolonged litigation allowed POSCO to establish a dominant commercial position in the interim.
This settlement illustrates the fundamental difficulty of trade secret litigation in Japan. Proving “secret management” is an extremely high hurdle for companies. It is not enough to simply assert that information was confidential — companies must demonstrate with concrete evidence that specific management measures, such as access restrictions and confidential markings (e.g., a “CONFIDENTIAL” stamp), were consistently applied before any breach occurred.
4. What Happened in the Lawsuit Against the Individual Employee?
Personal liability was established, and a damages order of approximately ¥1 billion was finalized. The court found as fact that the individual had received ¥30 million in compensation for providing technical information. Even after the corporate settlement, Nippon Steel continued to pursue the individual former employee. A 2019 Tokyo District Court ruling found that the employee had provided technical information to POSCO and had received ¥30 million in remuneration. The court held that this constituted disclosure of trade secrets for personal gain and to cause harm to the employer, ordering ¥1.023 billion in damages. The ruling was upheld on appeal to the Intellectual Property High Court and became final. It drew attention as the first large-scale civil judgment to make the monetary value of trade secrets visible.5. Did the Technology Leak Further?
Yes — it was subsequently diverted to China’s Baosteel via POSCO. Baosteel, backed by state capital, grew rapidly and came to shape global market pricing. The technology believed to have leaked through POSCO is reported to have reached Baosteel, China’s largest steel producer. From the late 2000s onward, China dramatically expanded its electrical steel production capacity. Nippon Steel recognized that Baosteel was exploiting its technology, but at the time had not filed the relevant patents in China, making litigation impossible.6. Why Was Toyota Sued in Japan? (2021)
The dispute centered on Toyota’s use of Baosteel-manufactured steel — alleged to infringe Nippon Steel’s patents — in electric vehicle motors. This was a new type of lawsuit challenging “upstream source control” of technology. In October 2021, Nippon Steel filed suit against Toyota Motor Corporation and Baosteel in the Tokyo District Court, asserting patent infringement of non-oriented electrical steel. Damages of ¥20 billion were sought from each defendant. The case concerned Toyota’s importation of Baosteel steel through Mitsui & Co. for use in electric vehicle motors. Mitsui was added as a defendant in December 2021. Nippon Steel simultaneously applied for a preliminary injunction to halt the manufacture and sale of Toyota vehicles using the disputed material. The case was closely watched as a dispute over the “upstream source management” of manufacturing technology. In a November 2, 2023 press release, Nippon Steel announced that it had withdrawn its claims against Toyota and Mitsui & Co., terminating the litigation.7. What Was the Outcome of the Chinese Domestic Litigation? (2024)
Nippon Steel’s patent was declared invalid. A coalition of Chinese and Korean challengers dismantled and analyzed a Fiat 500 produced before the patent’s priority date, successfully proving that the relevant technology had already been publicly practiced. On July 3, 2024, China’s National Intellectual Property Administration (CNIPA) declared Nippon Steel’s high-strength automotive steel patent (ZL201280016850.X) invalid, citing lack of novelty and inventive step. The invalidity challenge had been filed by a coalition including Baosteel and POSCO. The evidentiary methodology deserves particular attention. The challengers purchased a 2009 Fiat 500 in Italy, disassembled it, and analyzed its components before a notary public. The parts were found to correspond to the technical features of Nippon Steel’s patent and were held to have been “publicly practiced” prior to the patent’s priority date (2011). This approach is said to have been recognized as an international model for evidence chain construction, significantly influencing subsequent examination standards.8. Why Did Japan Suffer a Structural Defeat?
This series of events is not merely a corporate dispute. It exposed the fragility of Japan’s intellectual infrastructure.8-1. Legal Delay Structures
In Japan, the authority to investigate and protect trade secrets is legally limited, creating significant delays in enforcement response.8-2. Insufficient Institutional Defenses
China has progressively expanded its national security framework into the economic sphere. Through its Anti-Espionage Law and Data Security Law, it has institutionalized the containment of strategic technologies.8-3. Management Blind Spots
Many Japanese companies treated technology as the exclusive domain of their R&D departments. What was absent was an integrated strategy spanning legal, intellectual property, and executive leadership. The result was a triple defeat: Japanese technology could not be protected by law, could not compete on speed, and was encircled at the institutional level.9. What Technology Defense Measures Are Needed Going Forward?
Preventing technology leakage is not solely a legal department issue. It is a corporate governance imperative. There are four essential pillars:9-1. Redesigning Compensation Structures
Award core engineers RSUs (Restricted Stock Units) and PSUs (Performance Stock Units), aligning the value of their technology with the value of the company itself.9-2. Operationalizing Secret Management
Move from formal to substantive trade secret management. Access control and auditing must extend to departing employees, contractors, and overseas subsidiaries.9-3. International Evidence Strategy
Research notebooks, test data, and design histories should be notarized and preserved as evidence from the outset, with the permanent possibility of overseas litigation in mind.9-4. Enacting a National Economic Espionage Prevention Law
Japan needs legislation to criminalize acts committed abroad, along with a structured corporate reporting system.You are welcome to contact us via the Contact Form to discuss and for more information.