INSIGHT: The Rise in Economic Espionage Cases Involving China

May 9, 2019, 8:01 AM

Economic espionage prosecutions highlighted by the Department of Justice will likely continue to increase, so long as the U.S. continues to pursue adversarial trade policies with China.

The economic impacts of intellectual property thefts involving China are significant. By some estimates, the U.S. loses more than $300 billion each year from such intellectual property losses. China is also the country with whom the U.S. has the largest trade deficit, totaling more than $400 billion. Many experts believe that Chinese economic policy depends, at least in part, on the accumulation of foreign intellectual property assets by means both lawful and unlawful.

The DOJ announced in November 2018 the launch of the “China Initiative,” an inter-agency effort spearheaded by DOJ and FBI leadership and several U.S. attorneys, focused on combating the recent surge in economic espionage allegedly perpetrated by Chinese state actors.

In describing the initiative, then-Attorney General Jeff Sessions announced the DOJ was pursuing prosecutions in a series of economic espionage cases in which the defendants, primarily Chinese nationals or entities, were alleged to have stolen trade secrets on behalf of the Chinese government. These federal criminal cases are being litigated in venues across the country, and involve the alleged theft of trade secrets and other confidential information in a range of diverse industries, from aerospace to energy to pharmaceuticals.

In December 2018, in announcing the criminal indictment of two Chinese hackers alleged to have compromised computer storage firms in at least a dozen different countries, Deputy Attorney General Rod Rosenstein revealed that “more than 90 percent of the Department’s cases alleging economic espionage over the past seven years involve China.” Rosenstein further revealed that “[m]ore than two-thirds of the Department’s cases involving thefts of trade secrets are connected to China.”

Consistent with the department’s primary focus on pursuing criminal trade secrets cases involving China, within the past year, federal prosecutors have announced a series of high-profile criminal prosecutions against Chinese nationals and Chinese companies alleged to be affiliated with state-owned entities.

For example, in September 2018, state-owned Chinese company Pangang Group Company, Ltd., and certain of its subsidiaries and officers were charged in the Northern District of California with conspiring to commit economic espionage and stealing trade secrets from E.I. du Pont de Nemours and Company. The charges include the alleged thefts of trade secret photographs of certain DuPont chemical plant technologies and facilities.

Uncertain Impact on Civil Trade Secrets Litigation

In the civil litigation context, the filing of civil trade secrets cases had already been on the rise before the announcement of the China Initiative. Between 2016, when the federal Defend Trade Secrets Act was passed, and the middle of 2018, the number of trade secrets cases filed in federal and state courts increased by 30 percent.

Because parallel civil litigation frequently accompanies the filing of criminal trade secrets charges, it would not be unreasonable to assume that the recent surge in criminal prosecutions involving China may fuel an increase in civil trade secrets litigation. Indeed, the stated purposes of the China Initiative include not only curbing the virtual theft of trade secrets by computer hackers, but keeping the valuable intellectual property of U.S companies from being physically “carried out the door by an employee in a matter of minutes.”

But there are complications unique to the litigation of civil trade secrets cases, especially in jurisdictions—like California—with strong public policies in favor of employee mobility. Not surprising, given the size of its economy and geographic proximity to Asia, California is reported to be the state with the highest frequency of acts of economic espionage perpetrated by Chinese actors, by a factor of several multiples.

However, California also has a very strong public policy in favor of employee mobility, meaning that the effective reach of trade secrets misappropriation claims is often circumscribed by countervailing judicial doctrines. For example, unlike other states, in California, contractual noncompete agreements are considered unlawful restraints on trade, regardless of whether deemed necessary for the protection of trade secrets, and are deemed unenforceable for that reason in all but a handful of circumstances.

In the trade secrets context, California also rejects the “inevitable disclosure” doctrine, meaning that a plaintiff seeking injunctive relief in California must be able to demonstrate actual or threatened harm of trade secrets misappropriation, and may not merely argue that trade secrets use is “inevitable” given the defendant’s employment in a similar job position.

Finally, the Ninth Circuit is in the minority among federal circuit courts in giving a narrow interpretation to the federal Computer Fraud and Abuse Act (CFAA), the federal “computer hacking” statute, in the employment context. Unlike in other circuits, a plaintiff suing under the CFAA in the Ninth Circuit must demonstrate that the defendants actually accessed a protected computer “without authorization”; it is not enough to demonstrate merely that the defendant misused protected information after being provided authorized access.

Private litigants seeking to enforce their trade secrets claims in California therefore face a relatively higher burden of proof and have access to a comparatively more limited set of remedies, than in other jurisdictions.

Prospects of Monetary Recoveries Uncertain

Second, while criminal prosecutions are frequently pursued primarily for deterrence purposes, a private litigant’s prospects of obtaining substantial monetary recoveries from Chinese defendants is decidedly more uncertain, because of the difficulties inherent in obtaining and enforcing judgments against parties in China.

Although China is a member of the Hague Convention, requests to serve a resident of mainland China with legal process must be coordinated through China’s Central Authority, and efforts by the Chinese authorities to perfect service of process in China are not dependable. U.S. courts therefore lack power to reliably compel the appearance or participation of Chinese residents in U.S. legal proceedings. And historically, U.S. civil judgments have not been enforceable in China.

Given these significant limitations in the enforcement and collection of private money judgments, it would not be unreasonable to expect that private litigants contemplating the costs of cross-border litigation, without the resources of the U.S. government at their backing, will necessarily be more selective in deciding what types of civil litigation to pursue against Chinese adversaries.

Finally, while aggressive enforcement of the economic espionage laws is frequently justified on national security and foreign policy grounds, there are practical reasons to believe that, in the commercial context, the impact of a policy that expressly targets Chinese companies will be mitigated, at least to some extent, by countervailing business realities.

China is the largest single-nation trade partner of the U.S. There are more foreign students from China attending universities in the United States than from any other nation. And the number of prominent U.S. companies that are in turn dependent on manufacturing facilities and other resources based in China are legion, and include some of the largest American companies, including Apple, Nike, Cisco, IBM and Walmart.

Against this backdrop, there are good reasons to believe that any increase in civil trade secrets litigation against Chinese defendants will be tempered, at least to some extent, by the inherent interconnectedness and interdependency among United States and Chinese commercial concerns in today’s global economy.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Paul S. Chan is the managing principal and a trial lawyer at Bird Marella in Los Angeles. He handles high-stakes complex business disputes involving commercial fraud, class action and intellectual property litigation. He can be reached at pchan@birdmarella.com.

To read more articles log in.

Learn more about a Bloomberg Law subscription.