Huawei/CNEX and the Role of Trade Secrets in the U.S.-China Trade War

“Although it’s unclear whether there’s an actual uptick of trade secret theft by Chinese nationals in recent years,[…] the ongoing trade dispute between the U.S. and China has certainly led to more investigations and prosecutions of such cases.” late May, news reports surfaced regarding allegations of trade secret theft committed by Chinese telecom giant Huawei Technologies that had been made in an Eastern District of Texas case. The claims targeted an executive working for Huawei who is accused of participating in a scheme to misappropriate trade secrets from California-based semiconductor startup CNEX Labs. The recent filings mark a new turn in the case, which was originally filed in 2017 by Huawei when it accused CNEX of committing trade secret theft and poaching employees in an effort led by a former Huawei employee and CNEX co-founder.

CNEX Labs might be a startup, but it has been attracting venture capital funding for its cloud software and solid-state drive controller products from major names in the tech industry, including Dell and Microsoft. While Huawei has made its own allegations against CNEX, news reports indicate that Huawei’s attempt to access a closely guarded research project by working through a Chinese university professor isn’t an isolated incident. In fact, such activities may be a major factor behind the company’s rapid rise in recent years.

Trade Secret Theft May Support China’s Goals of Technological Dominance

While the Huawei allegations may be attracting the bulk of the media attention on Chinese intellectual property theft, the telecom firm is hardly the only Chinese entity which has been the center of such accusations. Alibaba, Sinovel Wind Group and Fujian Junhua are just a few other companies that have been implicated in trade secret allegations made by American firms in recent years. A CNBC survey of corporate chief financial officers published this March reports that one in five of the North America-based firms surveyed had reported IP theft by Chinese entities.

Intellectual property investigations that involve trade secret theft and economic espionage continue to be a top priority for the Department of Justice (DoJ), according to the Annual Intellectual Property Report to Congress released by the office of the U.S. Intellectual Property Enforcement Coordinator (IPEC) this February. Of the 195 IP investigations being conducted by the Federal Bureau of Investigations (FBI) and pending at the end of 2018, IPEC reported that 67 of these investigations involved trade secret theft, making trade secrets the focus of the largest number of pending IP investigations. China has been at the center of U.S. trade secret concerns for many years and the Communist nation has been cited as the primary culprit, behind piracy of American intellectual property by foreign actors, which is estimated to cost the U.S. anywhere from $225 billion up to $600 billion each year.

The issue of trade secret theft and misappropriation has called into question China’s motives behind its Made in China 2025 program, an initiative unveiled in 2015 that aimed to vault the country to international dominance in several key technology sectors. However, since the Trump Administration has ramped up its enforcement campaign against Chinese theft of American IP, China has pulled back from making any official mention of the program or its progress.

Economic Espionage Charges: Good Deterrent, Poor Enforcement Mechanism

While cyber-attacks from Chinese entities may grab headlines in the media, a majority of the trade secret cases involving Chinese nationals still occur in the traditional commercial context said Paul Chan, Managing Principal of Bird Marella. In 25 years as a trial attorney, a large part of Chan’s practice has involved trade secret and economic espionage cases. Over the past six to eight years, Chan says that an increasing number of these cases have involved Chinese nationals. While many of these cases overlap with government investigations concerning potential violations of the Economic Espionage Act, most trade secrets cases involving Chinese nationals that he’s worked on involve circumstances like the case between Huawei and CNEX, where employees move between companies and one firm ends up believing that its trade secrets have been compromised. “They might not always be the most high-profile cases, but they’re still the majority,” Chan said.

While there have been more cases proceeding to federal court under the Economic Espionage Act, Chan said that this law was often used primarily as a mechanism to dissuade potential bad actors and not as a way to obtain actual monetary redress for trade secret misappropriation. “A lot of times, Economic Espionage Act cases are brought for deterrent value against Chinese nationals who might be outside of the court’s jurisdiction,” Chan said. “If the goal is to deter this conduct generally and try to impress upon companies that there are serious negative consequences for engaging in such misconduct, then it’s effective. But it’s less clear whether the Act is necessarily a better vehicle for enforcing trade secrets on a day-to-day basis or for obtaining money damages than other trade secret laws, whether those are state statutes or the Defend Trade Secrets Act.”

Even when a judgment is entered against a Chinese national, trying to enforce that judgment in China is extremely difficult. To begin with, the procedure to effect service on a Chinese resident is unreliable, because it typically involves a highly politicized process at the China Central Authority, the governmental body to which entities outside of China must apply in order to obtain a service of process to subpoena a Chinese citizen. And unlike countries that are signatories to international treaties on recognition and enforcement of foreign court judgments, China is not a signatory to any such treaty with the United States. Thus, there are only a handful of examples in which U.S. judgments have ever been enforced in China, because Chinese courts typically do not deem the United States to have established a reciprocal relationship with China.

Effects of the U.S.-China Trade War

Although it’s unclear whether there’s an actual uptick of trade secret theft by Chinese nationals in recent years, Chan said that the ongoing trade dispute between the U.S. and China has certainly led to more investigations and prosecutions of such cases. Last November, the DoJ announced a China Initiative, which has resulted in increased efforts to address national security threats from China, especially the theft of trade secrets. One such investigation being pursued by the DoJ involves Huawei CFO Meng Wanzhou, who was arrested in Canada this past December and has been undergoing extradition in order to face charges in the U.S. regarding bank and wire fraud in violation of sanctions on Iran. “The way that case is being covered by the media makes it pretty clear that the extradition is being used politically by the U.S. as a pressure point in the course of its larger efforts to keep Huawei from increasing its trade position relative to the U.S.,” Chan said. Huawei has been a favorite target of the Trump Administration and was recently banned from doing business with U.S. component suppliers, although the Chinese telecom giant has recently offered to enter into a “no-spy agreement” to address national security concerns in hopes of rescinding the ban.

Chan said that it was still too early to tell whether the uptick in prosecutions against Chinese nationals accused of stealing trade secrets will be a long-term phenomenon or just a temporary offshoot of the current trade war. “As much as the current administration is hostile towards China, the two countries are so interrelated,” Chan said, noting the large number of U.S. companies with manufacturing facilities in China as well as the many Chinese students attending American institutions of higher education. Chan said that, in his observation, the increased regulatory regime around trade secrets and immigration laws appears to have contributed to decreased investment by Chinese entities into the U.S. Extremely long wait times for Chinese investors looking to obtain EB-5 visas by making large-scale investments in the United States has also helped to reduce any flow of wealth from China to the U.S.

China is still developing its own intellectual property system and it’s very likely that at least some trade secret theft cases arise from situations involving Chinese nationals who are unfamiliar with trade secrets as a form of IP. “In many cases that we’ve handled, the Chinese company or individual simply has no real concept of what protectable trade secrets are,” Chan said. “That’s not to say that trade secrets don’t exist in China, but in many ways trade secrets are more amorphous than patents, trademarks or copyright. The concept of a trade secret that has economic value has been slow to take hold in China.”

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2 comments so far.

  • [Avatar for Pro Say]
    Pro Say
    June 14, 2019 01:59 pm

    “Made in China 2025”

    More accurately:

    Stolen from America 2025.

  • [Avatar for Joe America]
    Joe America
    June 14, 2019 09:25 am

    One need look no further than the graduate studies programs at any major University in the United States to find such Chinese espionage. Spies do not look like James Bond – they look like foreign college students. They are granted access to our best research projects and protected from scrutiny by political correctness of those same Universities. And as the article states, once they return home to China with their mission complete, they are untouchable.