In Part 3 of a series of Insights on U.S. enforcement against China-based companies, Kirkland & Ellis attorneys focus on the increase in trade secret prosecutions, related civil litigation, and implications for Chinese companies.
This article is the third in a series exploring how U.S. enforcement activities affect Chinese companies. The first two Insights addressed the increase in prosecutions under the Foreign Corrupt Practices Act and recent U.S. sanctions, export controls, and anti-money laundering trends. This article focuses on the increase in trade secret prosecutions, related civil litigation, and implications for Chinese companies.
The ‘China Initiative’ and Rise in Trade Secret Prosecutions
“Chinese economic espionage against the United States has been increasing and it has been increasing rapidly. Enough is enough. We’re not going to take it anymore.”—Atty. General Sessions, November 2018.
As these words from the former attorney general make clear, allegations of trade secret theft have become part of the heated rhetoric surrounding the Trump administration’s broader economic hostilities with China. Prosecuting trade secret cases against Chinese companies has also become an increasingly prominent feature of those hostilities. In November of 2018, the Department of Justice announced a “China Initiative,” promising it would be “redoubling [its] efforts to aggressively investigate Chinese companies and individuals for theft of trade secrets[.]”
Prior to that announcement, there was already a marked increase in trade secret prosecutions in recent years, with many targeting Chinese companies. This included the corporate conviction in early 2018 of Sinovel Wind Group on charges that it stole trade secret software used to run wind turbines and electrical grids.
It also included several guilty pleas and convictions of Chinese nationals or agents employed in the United States on charges of trade secret theft of biotechnology, aerospace technology, software, manufacturing processes and materials for the benefit of China or Chinese companies.
In the seven months since the Initiative was announced, several more high-profile indictments have come down targeting Chinese companies, including a heavily-publicized case alleging that Huawei stole trade secret technology from T-Mobile used to test mobile phones, and other indictments alleging that Chinese nationals or agents stole trade secrets from General Electric and other American companies for the benefit of China or Chinese companies in the fields of energy, petroleum and manufacturing.
Others are likely to come down in the near future.
The consequences of a prosecution can be incredibly grave for Chinese companies and their employees. The DOJ has pursued the prosecutions noted above under the Economic Espionage Act (EEA). The EEA includes provisions addressing foreign “economic espionage,” i.e. the theft of a trade secret to benefit a foreign government or agent.
In 2012, Congress amended the EEA to increase the penalties for organizations and individuals, and the Sentencing Commission amended the Sentencing Guidelines (§ 2B1.1(b)(14)) to provide sentencing enhancements for trade secret thefts seeking to benefit a foreign government or agent.
The escalation of the penalties can result in huge fines and potentially prison sentences for officers, directors or employees of Chinese companies who are convicted.
Criminal filings often also trigger follow-on civil litigation. The incentive to file has increased since 2016 with the passage of the Defend Trade Secrets Act (DTSA), which created a private right of action in federal court for trade secret misappropriation. Civil trade secret litigation is notoriously burdensome and expensive, and DTSA provides for doubling of civil damages in cases of willful and malicious misappropriation of trade secrets.
Key Takeaways for Chinese Companies
Chinese companies should take specific steps to understand and mitigate risks surrounding allegations of trade secret theft:
1) Understand U.S. Trade Secret Laws. What qualifies as a trade secret, or misappropriation, under U.S. state and federal laws can be complex and uncertain. Civil trade secret litigation also can present challenging questions of preemption with other laws, and policies favoring employee mobility. It is important for Chinese companies to understand what material may be entitled to trade secret protection under U.S. laws, and how it should be treated, to ensure compliance.
2) Develop Strong Compliance Controls. It is also important for Chinese companies to develop strong internal compliance programs and controls to ensure appropriate steps are taken to mitigate the risk of non-compliance or the appearance of non-compliance to U.S. regulators. The Sentencing Guidelines expressly address the need for, and look favorably upon, an effective compliance and ethics program. Having consistent, well-documented, and enforced policies is an important risk mitigation measure.
3) Conduct Appropriate Diligence in Hiring. When hiring employees from the United States, particularly employees of competitors, it is important to understand their contractual obligations, and make clear that the company has no interest in unlawfully acquiring trade secret information that is protected from disclosure under U.S. laws. This is another area in which clarity and documentation are important.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Yi-Chin Ho is a litigation partner in the Los Angeles office of Kirkland & Ellis LLP. Ho’s practice focuses on representing Chinese companies, based in the U.S. and abroad, ranging from multinational public companies to emerging companies, in antitrust and trade regulation, white collar and government investigations, securities fraud and investigations, class action, intellectual property and other complex, cross-border business litigation matters.
Jonathan Faria is a litigation partner in the Los Angeles office of Kirkland & Ellis LLP. Faria has represented and counseled leading U.S. and multinational corporations in a variety of substantive areas including antitrust and competition, trade secrets, consumer class actions, and complex commercial litigation.