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Peter Toren | Experienced Intellectual Property Lawyer

How Bad Really Is Chinese Economic Espionage?


On November 5, 2018, and shortly before being asked to resign by President Trump, Attorney General, Jeff Sessions ordered the creation of a “China Initiative” targeting economic espionage committed by companies based in the People’s Republic of China, and individuals having a connection to that country.[1] This initiative is notable in a number of respects: It is the first time that the Department of Justice has created an initiative that is focused on a particular country; and the language used by Sessions in describing the Chinese theft of U.S. companies’ trade secrets was particularly strong. Further, to emphasize the seriousness of this matter, at the same press conference, Sessions also announced the indictment of, the Taiwan based United Microelectronics Corp., China’s state-backed Fujian Jinhua Integrated Circuit Co. Ltd. and three Chinese individuals for conspiring to and committing the theft of trade secrets and economic espionage from Micron Technology under  both sections 1831 and 1832.[2] The trade secrets related to the design of a leading memory storage device known as dynamic random-access memory, or DRAM.

It is not entirely clear what this initiative will actually mean since many of the EEA cases brought over the last five years have involved a connection to China. Regardless, companies in the United States with such a connection, or U.S. companies doing business in China or with Chinese based companies need to be aware of this enforcement priority and should prepare accordingly,  and need to develop and adopt plans and procedures focused on respecting third-party trade secrets, and take steps to investigate potential violations. On the other hand, if the extent of Chinese economic espionage is as serious as claimed by the DOJ then U.S. companies especially those doing business in China or with Chinese affiliate companies, need to be hyper-vigilant about protecting their own trade secrets. While issue is very important, it is not the subject of this article.

            At the press conference, Sessions described the importance of technology to the United States, which he claimed has given the U.S. “advantages both economically and militarily that have directly benefitted the daily lives of the American people.” He asserted that while China committed publicly in 2015 “that it would not target American companies for economic gain,” China has not kept this commitment. He then asserted that “enough is enough” and that “China cannot be a safe haven for criminals who run to China when they are in trouble, never to be extradited. China must accept the repatriation of Chinese citizens who break U.S. immigration law and are awaiting return.”

            The DOJ also announced that five U.S. Attorneys from the Northern District of Texas, Eastern District New York, California, Northern District of Alabama, and District of Massachusetts will serve on the “China Initiative,” which will be led by the Assistant Attorney General for National Security.[3] Although the DOJ did not announce specific steps it will take, it did provide the following “Initiative Goals:

“(1) Identify priority trade secret theft cases, ensure that investigations are adequately resourced, and work to bring them to fruition in a timely manner; (2) Develop an enforcement strategy concerning non-traditional collectors (e.g., researchers in labs, universities, and the defense industrial base) that are being coopted into transferring technology contrary to U.S. interests; (3) Educate colleges and universities about potential threats to academic freedom and open discourse from influence efforts on campus; (3) Apply the Foreign Agents Registration Act to unregistered  agents seeking to advance China’s political agenda, bringing enforcement actions when appropriate; (4) Equip the nation’s U.S. Attorneys with intelligence and materials they can use to raise awareness of these threats within their Districts and support their outreach efforts; (5) Implement the Foreign Investment Risk Review Modernization Act (FIRMA) for DOJ (including by working with Treasury to develop regulations under the statute and prepare for increased workflow); (6) Identify opportunities to better address supply chain threats, especially ones impacting the telecommunications sector, prior to the transition to 5G networks; (7) Identify Foreign Corrupt Practices Act (FCPA) cases involves Chinese companies that compete with American businesses; (8) Increase efforts to improve Chinese responses to requests under the Mutual Legal Assistance Agreement (MLAA) with the United States; and (9) Evaluate whether additional legislative and administrative authorities are required to protect out national assets from foreign economic aggression.”[4]

It is not clear from the announcement of the Initiative how this actually will lead to an increase in number of prosecutions brought against Chinese entities in light of the number of Chinse connected prosecutions that the government has brought to date under the EEA. So far, of the 178 cases involving alleged violations of Section 1832, 50 (28 percent) have a connection to the PRC. The percentage is even higher with regard to Section 1831 cases: of the 16 cases, eleven (69 percent) involve allegations of PRC government involvement. In addition, of the ten prosecutions brought in the last year, six have a Chinese connection.  

Further, if the severity of the violation is to be judged by the length of the sentence, the two most serious EEA cases to date also have a Chinese connection: (1) Following a three-week bench trial, on July 16, 2009, the court convicted Dongfan Greg Chung of stealing trade secrets from his employer Boeing and from Rockwell Helicopter with the intent to benefit the PRC, and sentenced him to 188 months imprisonment.[5] The trade secrets related to the space shuttle, Delta IV rocket, F-15 Fighter, B-52 bomber, and Chinook helicopter. The evidence at trial established that defendant first offered his services to the Harbin Institute of Technology in China in 1979, expressing his wish to contribute “to China’s Four Modernizations;” (2) More recently, on April 4, 2018, a district court in Kansas sentenced Weiqian Zhang to 121 months imprisonment after a federal jury convicted him of conspiring to steal samples of a variety of rice seeds from a Kansas biopharmaceutical research facility.[6] At trial, the evidence showed that in the summer of 2013, personnel from a crop research institute in China visited Zhang at his home in Kansas. On Aug. 7, 2013, U.S. Customs and Border Protection officers found seeds belonging to Ventria in the luggage of Zhang’s visitors as they prepared to leave the United States for China.

However, not all of the prosecutions brought by the government involving a Chinese connection have been successful, suggesting the possibility of government overreach in such cases. The government indicted Sherry Chen with illegally downloading data about national infrastructure, exceeding authorized access of a government computer, and making false statements to a federal official.[7] Chen was a hydrologist at the National Weather Service in Ohio, and apparently the government became interested in her after she traveled in 2012 to China to visit her parents. However, shortly before trial on March 10, 2015, the government dismissed without prejudice all of the charges against her. She has successfully sued the Department of Commerce to get job back, but the matter is on hold pending the outcome of an appeal filed by Commerce.

In another matter, the government charged Professor Xiaoxing Xi, with four counts of wire fraud.[8] The government alleged that Professor Xi, who was head of the physics department at Temple University, had defrauded a U.S. company by sharing technical proprietary information concerning a “pocket heater” with entities in China. The pocket heater was a device used for depositing certain films on flat surfaces, that government claimed that the pocket heater in question had “revolutionized” the field of superconducting magnesium diboride thin film growth. However, Xi was able to quickly determine that the government allegations were wholly without merit. The pocket heater was anything but “revolutionary” having been developed many years earlier by a person unrelated to the U.S. company, and its design was widely known and accessible to the public. After being confronted with these facts, the government moved on September 11, 2015, to dismiss without prejudice all counts against Xi.

With the likelihood of 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.”[9] Indeed, while the existence of a compliance plan is only factor in determining the culpability score,[10] 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.[11] This is not an insignificant difference.

[1] (last visited November 14, 2018).

[2] United States v. Microelectronics, et al, No. 3:18-CR-00465 (N.D.Cal. 2018).

[3] (last visited November 14, 2018).

[4] Id.

[5] United States v. Chung, 8:08-CR-00024 (N.D. Cal. 2008).

[6] United States v. Zhang, No. 2:13-CR-20134 (D.Kan. 2013).

[7] United States v. Xiafen Chen, aka “Sherry Chen,” No. 3:14-CR-00149 (S.D.Ohio 2014).

[8] United States v. Xiaxing Xi, No. 2:15-CR-00204.

[9] United States Sentencing Guidelines §8C2.5(f).

[10] 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).

[11] United States Sentencing Guidelines §8C2.6.