Economic Espionage and the U.S.-China Trade War
Combatting Chinese theft of U.S. intellectual property (IP) has been a principal policy focus of the Trump Administration, including through the utilization of the Section 301 investigation process, the subsequent imposition of tariffs on Chinese-origin goods, via challenges in international regulatory bodies such as the World Trade Organization, updated foreign investment restrictions and through targeted legal designations of entities such as the leading Chinese telecommunications and consumer electronics company Huawei. IP and trade secret theft are to this day some of the largest economic and national security threats facing the U.S. and American businesses. Apart from the international trade remedies implemented by the Administration, the U.S. legal system has been another critical theatre for countering theft of IP and trade secrets from American businesses, and prosecutions have ramped up over the last half decade using civil and criminal enforcement mechanisms.
The Economic Espionage Act of 1996 (“EEA”), 18 U.S.C. § 1831 et seq., is an act that makes theft or the misappropriation of trade secrets, especially through acts of industrial espionage, a federal crime. Such trade secret theft can lead to both civil and criminal enforcement actions. The EEA currently defines “trade secrets” broadly to include “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes.”1
Penalties under the EEA can be severe. In 2012, Congress revised the EEA to increase the penalties for organizations and individuals, and sentencing guidelines were increased for trade secret theft that seeks to benefit a foreign government or agent. A violation of the EEA can result in an individual being fined up to $500,000 and facing up to 10 years in prison, and a corporation found guilty can be fined up to $5,000,000. These penalties increase greatly if the trade secret theft or misappropriation benefits a foreign country or foreign agent.
In 2016, the EEA was again amended when Congress passed the Defend Trade Secrets Act (“DTSA”). The DTSA established for the first time a private cause of action for the theft or misappropriation of trade secrets, which prior to its enactment had largely been addressed under individual state laws.
The EEA and DTSA have been critical enforcement mechanisms for the U.S. government and private businesses in recent years to combat theft of corporate IP and trade secrets, in particular that of Chinese origin. A 2017 report from the independent Commission on the Theft of American Intellectual Property found that the annual cost to the U.S. economy from Chinese IP theft could be as high as $600 billion. More recently, a March 2019 survey found that one in five North American-based corporations on the CNBC Global CFO Council says Chinese companies have stolen their IP within the last year.2 And in April, the Department of Justice proclaimed that since 2011, more than 90 percent of the Department’s economic espionage prosecutions involve China, and more than two-thirds of all federal trade secret theft cases during that period have had at least a geographical nexus to China.3
The largest companies in the U.S. are not immune to such theft, and the EEA has been utilized in several recent high-profile prosecutions, including against a former Chinese national software engineer of IBM for the theft of proprietary source code4, a former Chinese national employee of Apple for the theft of a confidential circuit board schematic drawing designed for autonomous vehicles5 and a Chinese Ministry of State Security intelligence officer for his attempt to steal trade secrets from multiple U.S. aviation and aerospace companies, including GE Aviation.6
Beyond the government’s use of the EEA, the broad reach of the DTSA makes it important for every U.S. business to understand its nuances. The DTSA protects trade secrets if a company has taken reasonable measures to keep such information secret and “the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”7 Trade secret misappropriation and the implications of the DTSA are therefore also prevalent in everyday business matters, including employment contracts and areas such as non-disclosures, non-compete, or confidentiality contractual provisions. The DTSA further provides important civil remedies for victims of trade secret theft, including the possibility of injunctive relief and even seizure of the allegedly stolen trade secrets.
The EEA and DTSA are significant enforcement mechanisms for both the U.S. government and private businesses, which has been further underscored in recent years in light of ongoing malevolent Chinese industrial espionage activity. Conducting robust due diligence on new employees, foreign investors, and supply chain entities is more important than ever for U.S. businesses and their research and development entities. The effects of the U.S.-China trade war are a global concern, and problems such as securing future U.S. telecommunications networks from supply chain threats, eliminating foreign direct investment calculated to obtain proprietary U.S. trade secrets and technology, and continuing to fight industrial cyberespionage must remain a top priority for the U.S. moving forward.
Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues, including identifying import/export licensing strategies, advising on global anti-corruption compliance, and counseling on Office of Foreign Assets Control (OFAC) economic sanctions programs.
Joe Whitley is a shareholder with Baker Donelson who represents national and international clients in various white-collar criminal matters including regulatory enforcement, corporate internal investigations and the Foreign Corrupt Practices Act (FCPA). During the Ronald Reagan and George H.W. Bush administrations, he served as Acting Associate Attorney General, the third-ranking position at Main Justice.
Alan Enslen is a shareholder with Baker Donelson who works with clients in international trade and national security matters, as well as government enforcement and investigations and trade remedy disputes. Enslen represents clients in numerous areas of international trade including economic/trade sanctions programs and global anti-corruption laws.
This article includes the following references:
118 U.S.C. § 1839(3).
2Eric Rosenbaum, 1 in 5 corporations say China has stolen their IP within the last year: CNBC CFO survey, CNBC (March 1, 2019) https://www.cnbc.com/2019/02/28/1-in-5-companies-say-china-stole-their-ip-within-the-last-year-cnbc.html.
3Deputy Assistant Attorney General Adam S. Hickey of the National Security Division Delivers Remarks at the Fifth National Conference on CFIUS and Team Telecom, Department of Justice (April 24, 2019) https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-adam-s-hickey-national-security-division-delivers-0.
4Chinese National Sentenced for Economic Espionage and Theft of a Trade Secret From U.S. Company, Department of Justice Press Release (January 18, 2018) https://www.justice.gov/opa/pr/chinese-national-sentenced-economic-espionage-and-theft-trade-secret-us-company
5Former Apple Employee Indicted On Theft Of Trade Secrets, Department of Justice Press Release (July 16, 2018) https://www.justice.gov/usao-ndca/pr/former-apple-employee-indicted-theft-trade-secrets.
6Chinese Intelligence Officer Charged with Economic Espionage Involving Theft of Trade Secrets from Leading U.S. Aviation Companies, Department of Justice Press Release (October 10, 2018) https://www.justice.gov/opa/pr/chinese-intelligence-officer-charged-economic-espionage-involving-theft-trade-secrets-leading.
718 U.S.C. § 1839.