The criminal case arose after a jury in Washington State had awarded T-Moibile $4,8 million in damages for breach of contract. Interestingly, the jury failed to award T-Mobile any damages for trade secret misappropriation even though they determined that Huawei did misappropriate trade secrets relating to Tappy. T-Mobile is also seeking $18.4 million in attorney’s fees.
On January 27, 2019, the government announced the indictment of China’s Huawei Technologies Co. Ltd. and various affiliates for allegedly stealing information to duplicate a T-Mobile phone-testing robot as well as concealing its business dealings with Iran. The trade secret charges related to alleged efforts by two Huawei affiliates beginning in 2012 to steal information from T-Mobile regarding a phone-testing robot called Tappy The trade-secrets arm of the case stems from Huawei engineers who were allowed to use Tappy to test Huawei phones, according to the DOJ. Instead of complying with strict nondisclosure agreements, the employees measured and photographed T-Mobile’s robot and went so far as to steal a piece of it so that Huawei could reverse-engineer the model, according to the government.
This indictment represents another set of charges against a Chinese related entity. With this increased government focus on Chinese economic espionage, Chinese companies, and their U.S. affiliates should take a number of steps to lessen their potential criminal (and related civil exposure). Such companies, at the very least, should adopt strong compliance policies and procedures that show a respect for the intellectual property rights, including trade secrets, of third parties. Such procedures should cover how to address both inadvertently obtained third-party intellectual property, as well as the discovery of the misappropriation of such property by an employee of the company. The plan should also include procedures for hiring employees, and with third-party vendors and contractors. Finally, no compliance plan can be considered thorough if it doesn’t include the implementation of a training program for employees regarding the importance of respecting the intellectual property rights of third-parties. In short, companies must take all necessary steps to avoid being accused of having turned a blind eye to the use of another party’s intellectual property, including trade secrets. Companies need to be aware that the implementation of a compliance program does not insulate the company from criminal liability. Companies still can be held liable for the acts of their employees even when the employees acted directly contrary to the express instructions in the compliance plan. However, the existence and implementation of a compliance program offers at least two real and critically important benefits. First, lawyers for the company can cite the existence and implementation of a strong compliance plan to exercise discretion and decline the prosecution even the company technically violated the law. Second, such a plan can greatly affect the calculations used to sentence company pursuant to the U.S. Sentence Guidelines. A defendant company’s “culpability score,” which is used to calculate the ultimate sentence can be reduced substantially if, at the time of the offense, the company had in place “an effective compliance and ethics program.”[1] Indeed, while the existence of a compliance plan is only factor in determining the culpability score,[2] and the final determination often is a complicated process, the “base fine” may be reduced by 80%, or increased by up to 400% depending on the culpability score.[3] This is not an insignificant difference.
[1] United States Sentencing Guidelines §8C2.5(f).
[2] The other factors include the company’s involvement in or tolerance of criminal activity, prior criminal history, violation of an order, obstruction of justice, self-reporting, cooperation and existence of responsibility. United States Sentencing Guidelines §8C2.5(a)(-g).
[3] United States Sentencing Guidelines §8C2.6.
