Economic espionage cases continue to rise

The U.S. Department of Justice announced the launch of its "China Initiative," an inter-agency effort spearheaded by DOJ and FBI leadership and several U.S. attorneys in November 2018, focused on combating the recent surge in economic espionage allegedly perpetrated by Chinese state actors. The articulated objective of the initiative is to protect "discoveries that took years of work and millions of dollars in investment ... in the United States" from the "deliberate, systematic and calculated threats posed, in particular by the communist regime in China, which is notorious around the world for intellectual property thefts." (Attorney General Jeff Sessions Announces New Initiative to Combat Chinese Economic Espionage, United States Department of Justice press release (Nov. 1, 2018)).

In describing the initiative, then-Attorney General Jeffrey Sessions announced that 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.

Whether the rise in criminal economic espionage cases involving Chinese actors will be accompanied by a similar increase in civil trade secrets litigation is yet to be seen. While civil trade secrets litigation frequently accompanies the filing of criminal economic espionage charges, there are both legal and business reasons to question whether there will be a commensurate increase in private commercial litigation involving Chinese defendants.

The Rise of Criminal Economic Espionage Cases Involving China

Following the disclosure of the China Initiative, subsequent DOJ pronouncements confirmed that in the realm of economic espionage, far and away the primary focus of the DOJ's investigation efforts is Chinese state actors. 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." (Deputy Attorney General Rod J. Rosenstein Announces Charges Against Chinese Hackers, United States Department of Justice press release (Dec. 20, 2018)).

Consistent with the DOJ'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 Nemours & Company. The charges include the alleged thefts of trade secret photographs of certain DuPont chemical plant technologies and facilities. ("Four Chinese State-Owned Industrial Companies Arraigned In Economic Espionage Conspiracy," United States Department of Justice press release (Sept. 7, 2018)).

• In October 2018, a Chinese Ministry of State Security operative, Yanjun Xu, was arrested and charged in the Southern District of Ohio with attempting to commit economic espionage and steal trade secrets from multiple U.S. aviation and aerospace companies. Xu allegedly targeted various companies in the aviation filed, including GE Aviation, and recruited experts who worked for these companies to travel to China, under the guise of asking them to deliver a university presentation. Because Xu was arrested in Belgium, he was able to be extradited to the United States and indicted by a grand jury in the Southern District of Ohio. ("Chinese Intelligence Officer Charged with Economic Espionage Involving Thefts of Trade Secrets from Leading U.S. Aviation Companies," United States Department of Justice press release (Oct. 10, 2018)). His was the first instance of a Chinese intelligence official being extradited to the United States to be tried in a federal court.

• In October 2018, two Chinese intelligence officers and five Chinese hackers were charged with stealing corporate secrets and hacking into protected computers in the United States, Britain, France and Australia, by utilizing spearfishing emails and malware to steal turbofan technology used in American and European commercial airliners, for the benefit of a Chinese government-owned aerospace company developing a comparable aircraft engine. ("Chinese Intelligence Officers Accused of Stealing Aerospace Secrets," New York Times (Oct. 30, 2018)).

• In November 2018, the DOJ charged Fujian Jinhua Integrated Circuit, a Chinese state-owned company, a Taiwanese business partner, and several individuals with stealing trade secrets from Micron Technology, an American computer chip maker. The indictment, filed in the Northern District of California less than one year the filing of a civil trade secrets case by Micron against Fujian, alleges that at the defendants' direction, a former Micron executive induced two former colleagues to ultimately transfer over $8 billion worth of Micron trade secrets to Fujian. The Department is seeking remedies including over $20 billion in fines and up to 15 years in prison for the individuals. ("Justice Department Charges Chinese Company With Espionage," New York Times (Nov. 1, 2018)).

The economic impacts of intellectual property thefts involving China are significant. By some estimates, the United States loses over $300 billion each year from such intellectual property losses. ("The Impact of Chinese Espionage on the United States," The Diplomat Magazine (Dec. 4, 2018)). China is also the county with whom the United States has the largest trade deficit, totaling over $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. So long as the United States continues to pursue adversarial trade policies with China, it seems likely that the number of economic espionage prosecutions highlighted by the Department's China Initiative will continue to increase.

Uncertain Impact on Civil Trade Secrets Litigation

Whether the federal government's focus on prosecuting Chinese economic espionage cases criminally, as reflected in the China Initiative, will lead to an attendant rise of civil trade secrets cases involving Chinese defendants is more uncertain.

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 the passage of the federal Defend Trade Secrets Act in 2016 and the middle of 2018, the number of trade secrets cases filed in federal and state courts had increased by 30 percent. (Lex Machina Trade Secret Litigation Report 2018 (July 18, 2018)).

Because parallel civil litigation frequently accompanies the filing of criminal trade secrets charges, as demonstrated by the Micron case in the Northern District of California, 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 United States 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 a strong public policy 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. ("Uncovering Chinese Espionage in the U.S.," The Diplomat Magazine (Nov. 28, 2018)). 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 non-compete 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. (Business and Professions Code Section 16600). 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. (Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (2002)). Finally, the 9th U.S. Circuit Court of Appeals is in the minority among federal circuit courts in giving a narrow interpretation to the federal Computer Fraud and Abuse Act, the federal "computer hacking" statute, in the employment context. Unlike in other circuits, a plaintiff suing under the CFAA in the 9th 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. (United States v. Nosal, 676 F.3d 854 (9th Cir. 2012)). 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.

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. United States' courts therefore lack power to reliably compel the appearance or participation of Chinese residents in United States legal proceedings. And historically, United States 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 United States 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 Chines companies will be mitigated, at least to some extent, by countervailing business realities. China is the United States' largest single-nation trade partner. ("These Are the Biggest U.S. Trading Partners," Fortune Magazine (April 2, 2018)). There are more foreign students from China attending universities in the United States than from any other nation. "("Number of International Collect Students Continues to Climb," U.S. News & World Report (Nov. 17, 2014)). And the number of prominent United States 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 Wal-Mart. 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.