Ninth Circuit Says Group of Chinese Companies Indicted for Trade Secret Theft Failed Foreign Sovereign Immunity Test

A group of Chinese companies struck out for a second time at the U.S. Court of Appeals for the Ninth Circuit Monday when the court ruled they lacked foreign sovereign immunity and therefore are not shielded from an indictment for economic espionage in connection with their alleged efforts to steal trade secrets from E.I. du Pont de Nemours & Company (DuPont).

Pangang Group Company Ltd. (PGC) et. al. (the Pangang Companies) appealed from a district court’s denial of their motion to dismiss an indictment charging them with economic espionage for theft of DuPont’s trade secrets relating to the production of titanium dioxide (TiO2). The Companies argued they enjoy foreign sovereign immunity because they are owned and controlled by the People’s Republic of China, an argument they had made in a previous appeal on different grounds.

In the first appeal, the Ninth Circuit rejected the Pangang Companies’ contention that the Companies qualified under the Foreign Sovereign Immunities Act (FSIA), finding they had failed to make a prima facie showing that they fall within the scope of the FSIA’s covered entities. On remand, the district court again rejected the Companies’ claims, which were in part based on federal common law, and they again appealed.

The Supreme Court in the meantime held in Halk Bankasi A.S. v. United States, 598 U.S. 264 (2023) that “common law, not the FSIA, governs whether foreign states and their instrumentalities are entitled to foreign sovereign immunity from criminal prosecution in U.S. courts.” The case was thus narrowed to focus on the common law arguments.

The Ninth Circuit noted that “[i]n assessing the domain of foreign sovereign immunity from criminal prosecution under federal common law, we are immediately confronted by the near-total lack of directly applicable precedent.” However, the court turned to “the available civil, government-enforcement, and quasi-criminal precedents addressing foreign sovereign immunity under the common law.”

While the Companies attempted to argue that, as subsidiaries of PGC, which was described as a “state-owned enterprise controlled by” the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC), they were controlled by the PRC, the appellate court explained that “immunity under § 66(g) turns on the functions the corporation exercises, not on the corporation’s ownership or control.”

Section 66(g) of The Restatement (Second) of Foreign Relations Law (1965) (“Restatement”) assessed the state of the common law at the time to be that “a corporation fell within the domain of foreign sovereign immunity only if it was ‘created under [a foreign state’s] laws and exercis[ed] functions comparable to those of an agency of the [foreign] state.’” Thus, said the Ninth Circuit panel, “[t]he mere fact that a foreign state owns and controls a corporation is not sufficient to bring the corporation within the ambit of § 66(g).”

The Pangang Companies also argued that their theft of the trade secrets “involved sovereign techniques—namely, espionage—and accomplished the PRC’s public objective of developing chloride-route TiO2 production technology.” But the Ninth Circuit opinion explained that the theft alleged in this case is not peculiar to sovereigns because it is more commercial in nature. “[T]he indictment and other documents filed in this case, on their face, indicate that the stolen information was sought and subsequently used for commercial gain,” wrote the court.

Even if the Companies could show that the secrets they stole benefited the PRC by helping it to reach its “publicly identified priority of developing chloride-route TiO2 production technology,” that is insufficient. The opinion explained:

“[A] generalized public benefit from a commercial enterprise’s economic exploitation of stolen trade secrets is not enough to transform that industrial espionage into the exercise of a function comparable to that of a state agency.”

Lastly, the court said that “principles of deference to the political branches on matters touching on foreign relations firmly counsel against recognizing foreign sovereign immunity here.” The Executive Branch has been trying to prosecute the Companies for 13 years, said the court, “in the face of their persistent claims of foreign sovereign immunity.” The court therefore deferred to the Executive Branch’s “considered judgment” on the matter and affirmed the district court’s denial of the Companies’ motion to dismiss.

This article was updated on May 2 to correct a typo in the spelling of The Pangang Companies’ name.