Court Quashes Summons of Indictment in Economic Espionage Act Prosecution Against Quinn Emanuel Chinese Client

by Quinn Emanuel Urquhart & Sullivan, LLP
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Last month, Quinn Emanuel won an important victory for its clients the Pangang Group and three of its subsidiaries in a closely watched criminal prosecution brought under the Economic Espionage Act (EEA). Pangang is one of the largest manufacturers of steel, titanium, and vanadium products in China. The government alleged that the Pangang defendants are state-owned companies controlled by a special government agency of the PRC and that Pangang had violated the EEA by misappropriating titanium dioxide (TiO2) production technology from E.I. du Pont de Nemours & Company (DuPont). On July 23, 2012, a United States District Court quashed the service of the summons, which may have ended the criminal prosecution, by ruling that the government had failed to properly serve the Pangang defendants under Rule 4 of the Federal Rules of Criminal Procedure. On August 16, 2012, the government indicated that it is exploring alternative methods to effect service. The next status conference is scheduled for October 11, 2012.

The Defendants
The firm’s clients are Pangang Group Co. Ltd. and its subsidiaries Pangang Group Steel Vanadium & Titanium Company, Ltd., Pangang Group Titanium Industry, Ltd., and Pangang Group International Economic & Trading Company, which manufacture and market steel, titanium, and vanadium products. Other defendants include several individuals and a corporate defendant associated with one of the individuals, Walter Liew. One individual pled guilty and awaits sentencing. All other defendants who were served await trial.

Indictment
The criminal prosecution arises out of a civil suit filed by DuPont against an individual named Walter Liew, his company, and one of his employees, for allegedly misappropriating trade secret materials that provided detailed specifications for DuPont’s chloride-route TiO2 process.

On July 27, 2011, the government filed a criminal complaint charging Mr. Liew and his wife with witness tampering in the civil case and lying to federal investigators. A grand jury indicted the Liews on those and other charges on August 23, 2011.

The government then filed a superseding indictment against additional defendants, including our clients, and with expanded charges. The Pangang defendants were indicted under the EEA for an alleged conspiracy to commit economic espionage, conspiracy to commit theft of trade secrets, and attempted economic espionage. The indictment alleges that the defendants conspired to steal trade secrets regarding DuPont’s process for manufacturing TiO2, a white pigment commonly used in paint, plastics, and paper. The indictment also alleges that DuPont has the largest share of the $12 billion global titanium dioxide market and that the Chinese government had identified the development of TiO2 production as a scientific and economic priority.

The Economic Espionage Act
The EEA criminalizes two types of trade secret misappropriation: “economic espionage,” as defined by 18 U.S.C. § 1831, and “theft of trade secrets,” as defined by 18 U.S.C. § 1832. These offenses share three elements: (1) misappropriation of information; (2) with knowledge or belief that the information is a trade secret; and (3) that the information is, in fact, a trade secret. Only section 1831 requires a nexus with a foreign government, punishing those who steal trade secrets “intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent.” 18 U.S.C. §1831(a).

Penalties under the EEA can be severe. Section 1831 and 1832 violations can result in up to 15 and 10 years in prison, respectively, and the statute carries a range of fines up to $15,000,000. Depending on the nature of the offense, those fines can be substantially increased given that the EEA is subject to the alternative fines provision of 18 U.S.C. § 3571(d), under which a defendant “may be fined . . . the greater of twice the gross gain or twice the gross loss” caused by the unlawful conduct. Violators are also subject to the provisions of the Mandatory Victim’s Restitution Act.

Although the law was passed in 1996, economic espionage prosecutions were rare until very recently. The DOJ is now investigating and prosecuting economic espionage cases on an unprecedented scale and two bills are pending before Congress seeking to amend the EEA to provide for enhanced penalties and broader civil remedies. Significantly, this is the first case in which the government charged an alleged foreign instrumentality directly rather than an individual who was allegedly trying to benefit the foreign government. The outcome will likely have an important impact on enforcement and amendment efforts.

Quinn Emanuel’s Motion to Quash
Pre-indictment, the government asked the General Manager of Pan America, a separate U.S. company and subsidiary of two of the defendants, to accept a letter to Pangang Group’s chairman and legal representative. The General Manager refused. His counsel advised the government that neither he nor Pan America were authorized to accept service for the Pangang defendants. The government nonetheless delivered the summons to serve the indictment to Pan America’s office manager on February 9, 2012. The government also sent copies of those four summons via certified mail to Pan America’s office in New Jersey.

The Pangang defendants moved to quash service of the summons on the basis that the government failed to comply with the service requirements of Federal Rule of Criminal Procedure 4(c). Rule 4(c) has both a delivery and a mailing requirement: a summons may be served “on an organization by delivering a copy to an officer, to a managing or general agent, or to another agent appointed or legally authorized to receive service of process” and the summons must be mailed “to the organization’s last known address within the district or to its principal place of business elsewhere in the United States.” The Pangang defendants argued that neither requirement was met in this case. The government argued that it complied with both requirements because Pan America is the general agent and the principal place of business in the United States for the Pangang defendants. It argued alternatively that Pan America is each of the Pangang defendants’ alter ego.

The court heard argument on the motion to quash over two days before taking the matter under submission. On July 23, 2012, the judge issued his opinion.

Prior Precedent
The jurisdictional conundrum that this case poses is rare. Normally, service is straightforward in the criminal context because defendants are either individuals who are arrested and brought into the court’s jurisdiction or corporate defendants with a U.S. presence that enables the government to comply with the Rule 4 requirements. Unlike the civil rules, the criminal rules have no provision for foreign service — the only way to serve corporate criminal defendants without a U.S. presence is to demonstrate alter ego. It is therefore not surprising that the government rarely attempts to serve summons on non-defendants in criminal cases.

As noted by the court, although the “interplay between personal jurisdiction, sufficiency of service, agency, and alter-ego has been addressed frequently in civil cases . . . there appear to be only four criminal cases” on this issue. In all four of those cases, service of criminal process on an affiliate or subsidiary was found sufficient as to a foreign defendant only where there were compelling facts supporting an alter-ego finding. See United States v. Johnson Matthey PLC, 2007 WL 2254676, *1 (D. Utah Feb. 26, 2007) (granting motion to quash); United States v. Alfred L. Wolff GmbH, 2011 WL 4471383 (N.D. Ill. Sept. 26, 2011) (granting motion to quash and refusing to endorse the notion that an alter ego analysis even applies to Rule 4 compliance); United States v. Chitron Electronics Co., Ltd., 668 F. Supp. 2d 298, 300 (D. Mass. 2009) (denying motion to quash where the U.S. subsidiary was a “mere conduit” for the Chinese parent); United States v. The Public Warehousing Company, 2011 WL 1126333, *1-2 (N.D. Ga. Mar. 28, 2011) (denying motion to quash based on twelve-factor test adopted from civil context to determine if the subsidiary was the alter ego of the parent). Those four decisions, along with the Pangang opinion, demonstrate that whether the government can pierce the veil to disregard the corporate form and separateness of the corporate entities is “heavily fact-specific.” See Public Warehousing, 2011 WL 1126333 at *6.

The Delivery Requirement
To satisfy the delivery requirement, the government had to show that it had served a summons on the Pangang defendants’ managing or general agent. In the Ninth Circuit, an agency relationship exists if (1) the domestic subsidiary functions as the parent’s representative “in that it performs services that are sufficiently important to the foreign corporation that if it did not have a representative to perform them, the corporation’s own officials would undertake to perform substantially similar services,” and (2) the foreign defendant exercises a measure of control over the domestic subsidiary. The government must show an independent agency relationship between each particular defendant — a general agency theory as to the defendants as a group will not suffice.

For three of the defendants, the court held that the government did not establish that Pan America acted as their agent. As to the fourth defendant, the court found that Pan America did act as its agent and the government had therefore met its burden to show it satisfied the delivery requirement. That did not end the inquiry, however, because the government also had to comply with the mailing requirement.

The Mailing Requirement
To satisfy the mailing requirement, the government must show that it mailed the summons to the organization’s last known address within the district or to its principal place of business elsewhere in the U.S. Here, the government argued that it complied with the mailing requirement by mailing a copy of each of the summons to Pan America as the defendants’ general agent. However, the court found that even if Pan America was a general agent, the mailing requirement must be mailed to the organization’s principal place of business, not to an individual officer, director or general agent. The court also rejected the government’s argument that actual notice is sufficient.

The court held that “the only way for the government to show that it has complied with the mailing requirement is to show that Pan America is the alter-ego of a particular Pangang defendant,” and that the government had failed to do so in this case. Pan America observes basic corporate formalities, keeps its own separate records, retains profits for its own purposes, and has many other indicia of corporate separateness.

Alternative Means of Service
After holding that the government had failed to serve the defendants under Rule 4, the court inquired whether there were alternative means of service. The U.S. and the PRC have a Mutual Legal Assistance Agreement (MLAA) regarding assistance in criminal cases. However, the MLAA gives the requested party discretion whether or not to effect service: “[T]he Requested Party shall not be obligated to effect service of a document which requires a person to appear as the accused.” MLAA, Art. 8, para. 1.

In this case, the U.S. government initially represented that it believed that the PRC would not agree to effect service on the Pangang defendants, and that it would therefore be futile to attempt service by way of the MLAA. However, on August 16, the government indicated that it was exploring alternative means of effectuating service, including under the MLAA.

Ramifications of the Court’s Ruling
At oral argument, the government told the Court that its ruling would effectively end the EEA case against Quinn Emanuel’s clients. In an August 16, 2012 joint status statement, the government said it is exploring alternative methods of effectuating service, including under the MLAA. The next status conference is scheduled for October 11, 2012.

The Pangang opinion will undoubtedly make it more difficult for the U.S. government to serve foreign corporations. This is especially significant because the federal government has recently been redoubling its efforts to combat the theft of trade secrets. For instance, the DOJ and FBI reported last year that they have “increased their investigations and prosecutions of corporate and state-sponsored trade secret theft,” and promised that “[t]this focus will continue.” 2010 U.S. Intellectual Property Enforcement Coordinator, Annual Report on Intellectual Property Enforcement, at 4 (Feb .2011), available at http://www.cybercrime.gov/ipecreport2010.pdf. In fact, in announcing the Pangang case, the United States Attorney for the Northern District of California proclaimed that “fighting economic espionage and trade secret theft is one of the top priorities of this Office and we will aggressively pursue anyone, anywhere, who attempts to steal valuable information from the United States.” DOJ Press Release, U.S. and Chinese Defendants Charged with Economic Espionage and Theft of Trade Secrets in Connection with Conspiracy to Sell Trade Secrets to Chinese Companies (Feb. 8, 2012), http://www.justice.gov/opa/pr/2012/February/120nsd-180.html. The precise effect of this case on the government’s ability to live up to that promise remains to be seen. In some cases, service could still be achieved through the mutual legal assistance treaties that the U.S. has with various countries, but, as we saw in this case, those governments may not always interpret the treaties to allow for or require service. Further, many countries have no such agreements with the U.S. at all.

The government has also shown an increased focus on and willingness to prosecute cross-border crimes and foreign corporations more generally. A prime example of this is in the realm of intellectual property and trade secrets, which is ever increasingly an international affair. A specific and significant example of this is the attempted prosecution of file sharing platform Megaupload, another Quinn Emanuel client. On January 5, 2012, the government indicted Megaupload, its founder Kim Dotcom, and six other individuals for alleged copyright infringement in one of “the largest criminal copyright cases ever brought by the United States.” The government seized Megaupload’s domain and assets and forced it to shut down, but to date has not served a summons on any of its officers or agents. Megaupload is a foreign entity with no U.S. agents, offices, or subsidiaries. Like the Pangang defendants, Megaupload specially appeared for the limited purpose of asking the court to dismiss the indictment for lack of personal jurisdiction. Its motion stated that the “Federal Rules do not contemplate service of a criminal summons on a wholly foreign corporation without an agent or offices in the United States.” See United States v. Kim Dotcom, et al., case number 1:12-cr-00003-LO, in the U.S. District Court for the Eastern District of Virginia.

The Pangang case firmly establishes that Rule 4 does not allow for service on foreign corporations without a U.S. presence, regardless of alleged actual notice. The only exception is where the foreign corporation has a U.S. alter ego, in which case it is no longer a truly foreign entity.

The case is United States v. Liew et al., case number 3:11-cr-00573, in the U.S. District Court for the Northern District of California.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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