On November 1, 2018, officials at the U.S. Department of Justice (DOJ) and the FBI announced the creation of a new “China Initiative.”
The purpose of the China Initiative is to “identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively.”
—then-U.S. Attorney General Jeff Sessions
The Initiative reflects DOJ’s “strategic priority of countering Chinese national security threats” and concern over “China’s trade practices.” The current U.S. Attorney General William Barr, who has a master’s degree in Chinese Studies, also supports the China Initiative.
Since its official announcement of the China Initiative on November 1, 2018, the initiation of six criminal cases that include references to both trade secrets and China have been publicized. While it is too soon to know the ultimate outcomes of these cases, an examination of these filings sheds some light on how the policy is being applied in practice.
Six-Month Summary: The China Initiative in Practice
- Criminal cases are largely initiated by victim companies
Four of the six newly filed cases appear to have been initiated by the victim companies. For example, the investigation in U.S. v. Chen appears to have begun when a colleague of the defendant reported him for taking photos in Apple’s autonomous vehicle workspace. Other news releases and indictments indicate that companies “reported the case to the FBI very quickly” or “cooperated with the government throughout the investigation.”
But in the other cases, the origins of the investigations are unclear. Here, it may be that the FBI became aware of hacking before the victim companies. The FBI’s Cyber Division regularly shares information with companies where this will not interfere with ongoing law enforcement investigations. The FBI often seeks further permission to monitor the victim's system and observe the adversary's continued activity, but victims are under no obligation to cooperate with the FBI.
- Defendants are not necessarily Chinese citizens
Of the five cases charging individuals, one is against a U.S. citizen, one is against a legal permanent resident in the U.S. who is a Chinese citizen, and three do not state the defendants’ citizenship at all. For example, the indictment in U.S. v. You explains that the defendant had degrees from U.S. schools and that she had been working in the U.S. since 1992, but it does not explicitly address her citizenship status.
Citizenship information can be useful because the theft of trade secrets statute can extend to cover conduct that takes place outside of the U.S. if the offender is a U.S. citizen or “permanent resident alien.” 18 U.S.C. § 1837. For example, this may be the situation in a recent case regarding the secret process for manufacturing a substance used in cell phone batteries, U.S. v. Tan. There the complaint details the defendant’s citizenship status as a legal permanent resident of the U.S., and his travel to China for new employment. It does not allege that the defendant actually shared the trade secret information while in China, but if facts later develop to support this allegation, then the groundwork will have been laid.
- Defendants are not “agents” of the Chinese state
None of the six cases allege that the defendants are agents of the Chinese government or other state-controlled entities. Instead, the defendants are usually persons who are job-hunting with companies in China or founding their own companies in China. Even in U.S. v. Wang, where it is alleged that “members of an extremely sophisticated hacking group operating in China” accessed Anthem’s computer network, no explicit connection between the defendants and the Chinese government is mentioned in the indictment. And while Huawei has become synonymous with the Chinese government’s economic interests in the minds of many Americans, the indictment against Huawei for trade secret theft does not contain any allegation that the company is state-owned or is state-controlled.
Such allegations are not necessary for a charge under the trade secrets theft statute, which requires only that the trade secret stolen “is related to a product or service used in or intended for use in interstate or foreign commerce.” See 18 U.S.C. § 1832. But given the stated purpose of the China Initiative, which is to “counter Chinese national security threats,” it is curious that DOJ is charging cases under this statute rather than under the Economic Espionage statute at 18 U.S.C. § 1831. The Economic Espionage statute carries more severe penalties than the theft of trade secrets statute. Of course, it also carries a requirement that prosecutors prove that “the offense will benefit any foreign government, foreign instrumentality, or foreign agent.” See 18 U.S.C. § 1831(a)(1).
- Courts split on whether to release defendants on bond
Four cases included individual defendants who were actually arrested and taken into custody. Two of those defendants were released on bond, and two were not. The two defendants who were released secured their bonds with real property. In one of these cases, the defendant’s wife and children also were required to surrender their passports. See U.S. v. Yu. In the other two cases, where the defendants were detained despite their requests for release, the judges’ decisions likely related to each defendant’s demonstrable ties to their community.
- Parallel civil suits are not filed simultaneously
Of the six criminal cases for trade secret theft filed in association with the China Initiative, none are currently accompanied by parallel civil suits for trade secret misappropriation. The one nearly divergent situation involves Huawei. Before the criminal trade secret theft case against Huawei was filed, T-Mobile brought a civil suit for trade secret claims against one of the same Huawei entities charged in the criminal case. The civil jury found Huawei misappropriated trade secrets under Washington State’s trade secret law, but it did not award any damages to T-Mobile.
It is likely that some alleged victim companies are simply waiting for the conclusion of the criminal cases before filing their civil suits against the defendants or the defendants’ new employers. The incentives to wait are many: if the government’s case goes first then it will bear the cost of the investigative work and initial litigation; the government can better recover some potential evidence through search warrants rather than civil discovery; and a company designated as the victim of a crime may be able to recover fees associated with its initial investigation. Of course, delaying the civil case also reduces the risk that an important witness will make contradictory statements in the criminal and civil trials. In some cases where the victim company is unlikely to collect damages from the defendant, it may not make sense to bring subsequent civil suits at all.
(Author on WeChat: SarainSD)
Download the Chinese version of this alert.