September 17, 2021

Volume XI, Number 260

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The China Pivot: Closing the “Back Door” to Trade Secret and IP Theft

During the Obama Administration, American foreign policy made a strategic “pivot” to Asia with the goal of establishing a more balanced economic, diplomatic, and security-focused approach and relationship between the U.S. and the region that would serve as a bulwark against growing Chinese influence (see, e.g., the Trans-Pacific Partnership).

But over the last four years, the Trump Administration did its own pivot, challenging China head-on, forcefully and aggressively. In implementing its China policy, the administration cracked down on “bad actor” companies with ties to the Chinese government accused of stealing trade secrets and intellectual property belonging to American companies, and it took steps to protect U.S. citizens from devices and networks that could be engineered with a “back door” that could enable foreign intelligence services to infiltrate U.S. infrastructure to spy on Americans. This effort also targeted Chinese nationals engaging in undercover espionage, such as the recent case of Yu Zhuo and Li Chen, husband and wife researchers for a Columbus, Ohio children’s hospital focused on isolating cell material used to help diagnose diseases. The couple pleaded guilty in August to stealing trade secrets regarding their research from the hospital, at which they worked for the last decade, and then selling those secrets to the Chinese government. A civil action by the hospital has been on hold pending the outcome of the criminal prosecution.

The poster child for the Trump Administration’s aggressive pivot has been Huawei, one of the largest global networking companies and telecommunications equipment manufacturers in the world. Although it has grown exponentially in the last decade, Huawei has been dogged by allegations that its growth resulted from corporate espionage and stealing U.S. trade secrets.  Indeed, the accounts of its brazen theft are legion and range from feigning interest with potential partners to access their technology, to planting and recruiting employees to steal competitor’s (and even partner’s) technology and reverse engineer it.

Not surprisingly, Huawei’s aggressive trade secret theft tactics have been the focus of major litigation. A notable example is the 2014 lawsuit by T-Mobile, in which Huawei was accused of, among other conduct, sending an engineer to a T-Mobile facility to see “Tappy,” the company’s computer driven robot with a mechanical arm used to test smartphone screens to improve the reliability of its handsets. The engineer slipped one of the robot’s fingertips into his laptop bag but was caught on camera. A federal jury awarded T-Mobile $4.8 million, and T-Mobile also sought its attorney’s fees and costs totaling more than $18 million (which appears to have been resolved out of court – the parties jointly stipulated to dismiss the action in December 2017).

The civil lawsuit was not the end of the story. In 2019, the U.S. government issued two federal indictments – a 16-count indictment in the Eastern District of New York and a 10-count indictment in the Western District of Washington – charging Huawei with trade secret theft, bank fraud, wire fraud, conspiracy charges, and other violations of U.S. laws. The charges involve not only the T-Mobile theft but also Huawei’s unlawful operation of sham entities to obtain otherwise prohibited U.S.-origin goods, technologies, and services for Huawei’s Iran-based business while concealing the link to Huawei (among other alleged misconduct and crimes).

Huawei also has been accused of designing its 5G next generation broadband networks with a “backdoor” that could be used to funnel sensitive data to China, along with having purposeful security holes in its smartphones and devices the Chinese government can use for surveillance. The Trump Administration has responded by effectively banning Huawei from the U.S. through a host of restrictions, including blacklisting Huawei affiliates and imposing export controls and trade restrictions. In doing so, the U.S. largely has acted alone, though it has pressured other countries, such as the UK and Canada, to impose similar measures with mixed results.

With the change of administrations on the horizon, the question becomes whether the Biden Administration will pivot in a different direction or continue along the same aggressive, “go it alone” approach adopted by its predecessor. Time will tell, but pronouncements so far seem to indicate that the new administration likely will to continue rigorously to enforce U.S. trade secret laws and protections to further national security interests and protect American companies. However, the Biden Administration may pursue a more multilateral approach to prosecute and regulate Chinese companies accused of misappropriation, marshalling the support and commitment of other countries in this effort. The fact is that bad actor companies – regardless of national origin – pose a serious threat to American trade secrets and intellectual property rights as well as U.S. national security.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 15
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About this Author

Steven P. Hollman Business Trial Attorney Sheppard Mullin Washington, DC
Partner

Steven Hollman is a partner in the Business Trial Practice Group in the firm's Washington, D.C. office and Leader of the Trade Secrets Team.

Areas of Practice

Steven has jury-tried patent, trademark and advertising cases during his career expanding  over 35 years and has successfully tried section 337 patent and trademark investigations before the ITC. Steve has handled numerous labeling and advertising disputes for major pharma and food companies, including class action advertising litigation, and for pharmaceutical innovators and life sciences companies....

202.747.1941
Imad S. Matini, business trial practice group, sheppard mullin, litigation lawyer, washington DC, regulatory compliance
Associate

Imad S. Matini is an associate in the Business Trial Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Mr. Matini’s practice focuses on business litigation and regulatory compliance.

Prior to joining the firm, Mr. Matini clerked for two federal judges: the Honorable Frederick P. Stamp, Jr. for the Northern District of West Virginia, and the Honorable Stephanie D. Thacker for the United States Court of Appeals for the Fourth Circuit.

...
202-747-2328
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