The re-opening of the U.S. government has brought with it a renewed assault on Chinese telecoms manufacturer Huawei and its U.S. subsidiary. On January 28, the U.S. Department of Justice unsealed two indictments against Huawei. The first indictment concerns ongoing claims against Huawei and its CFO, Meng Wanzhou, for allegedly violating U.S. sanctions against Iran. This indictment can be found here.
The second and more interesting indictment concerns alleged trade secret theft conducted by Huawei’s U.S. subsidiary under the direction of Huawei China. The trade secrets indictment can be found here.
The factual portion of both indictments makes for interesting reading. In particular, the trade secrets indictment should be read by any company that engages in technology based business relations with China. This is because the practices described in the indictment do not apply solely to Huawei. If you want a primer on “how they do IP theft” this is where to start. Note that if Chinese companies do in the United States what is described in this indictment consider what Chinese companies do in China.
Let’s say you have set up a WFOE in China to manufacture a critical chemical. The composition of the chemical and its method of manufacture are trade secrets. You have resisted the demands of your Chinese customers to set up a joint venture in China. You have resisted the demands of your Chinese customers to license your technology to a Chinese entity. The only Chinese persons with access to your technology are your Chinese employees. Since those employees are insiders, not outsiders, your technology is safe. Right? Unfortunately, the answer is no.
What can happen to the Chinese employees of your WFOE in China is exactly what allegedly happened to the Chinese employees of Huawei’s U.S. subsidiary. The local Chinese government will give your employees a detailed list of exactly what your employees must take from the WFOE and the timeframe in which they must complete the task. Though your Chinese employees may formally work for your WFOE, the Chinese government is essentially their ultimate “boss,” in the same way Huawei China is alleged to have been the ultimate boss of the employees of their U.S. subsidiary.
What though if your WFOE employee is an honest person and resists following the local government’s instructions? Or perhaps the employee is not so honest but resists simply because he or she does not want to risk losing his or her job if caught. The local government responds: your spouse works as a nurse in the local hospital and it would be too bad if she lost her job. Your father lives on a pension from the local government and it would be too bad if he lost his pension. Your daughter is applying for admission to the local high school and it would be too bad if she is denied entry. On the other hand, if you provide what we [the local government] have requested, we will ensure none of this happens. Moreover, you and your family will receive benefits. If you lose your job, we will find you another job. Don’t worry about it. Just do what you are told and help YOUR country. The pressure to comply is overwhelming and your Chinese employee complies. Your employee really has no choice.
This is the practice in China. Most WFOE managers in IP sensitive industries with whom I have worked in China understand this and so they do not even try to control their employees on IP because they know who is their real boss. They instead set up a costly system in which none of their Chinese employees is given access to the WFOE’s IP sensitive information. This makes operations difficult and oftentimes the system’s rules are violated and access to IP is granted. When that happens, the technology gets taken because the pressure from the government never stops, in the same way the pressure from Huawei China is alleged to have never stopped against Huawei’s . U.S. employees. This is what is often meant by “forced technology transfer.”
What then should companies that do business in China or with China take away from these two Huawei indictments? Note first of all that neither focus on security issues related to the Huawei equipment that has led the United States and other countries to ban Huawei 5G telecom equipment. That claim is specific to Huawei and the type of equipment it manufactures.
These indictments are focused on how Huawei conducts business. The U.S. Department of Justice (DOJ) is claiming is Huawei intentionally and as a matter of company policy violated U.S. law. For example, in the trade secrets indictment, the DOJ claims Huawei China directed its U.S. employees to steal trade secrets from T-Mobile and when the U.S. employees did not succeed at doing this, Huawei China dispatched a Chinese based engineer to complete the job. The indictment goes on to allege that when Huawei got caught taking T-Mobile’s IP, Huawei submitted an internal report lying about what happened. Huawei’s technology theft is alleged to have been part of a Huawei China program that paid its employees bonuses for stealing intellectual property.
The DOJ claims Huawei stole T-Mobile trade secrets and violated the Iran sanctions and by doing so it overturned the underpinnings of the U.S. legal system and the world legal order. The DOJ’s press release on the trade secrets case makes this clear:
“The charges unsealed today clearly allege that Huawei intentionally conspired to steal the intellectual property of an American company in an attempt to undermine the free and fair global marketplace,” said FBI Director Wray. “To the detriment of American ingenuity, Huawei continually disregarded the laws of the United States in the hopes of gaining an unfair economic advantage. As the volume of these charges prove, the FBI will not tolerate corrupt businesses that violate the laws that allow American companies and the United States to thrive.”
“This indictment shines a bright light on Huawei’s flagrant abuse of the law – especially its efforts to steal valuable intellectual property . . . to gain unfair advantage in the global marketplace . . .”
The U.S. charges are directed at the impact Huawei’s actions have had on both the United States and the rest of the world. The U.S. seeks to expand its claims against Huawei to go beyond the device security concern to a more general concern with how Huawei (and other Chinese businesses and, most importantly, China itself) violates the laws and regulations underpinning the modern free trade system. This is an ambitious goal that will extend beyond Huawei as a company and even beyond IP enforcement as a specific issue. The trade secret indictment complains of actions that go beyond U.S. jurisdiction. The indictments against Huawei read as a global campaign against how Huawei and China do business.
We should therefore expect additional DOJ enforcement actions against Chinese companies. Ms. Meng’s arrest in Canada should not be seen as an isolated case. Worldwide arrests and extradition proceedings and civil and criminal litigation against Chinese companies and their executives will become more common and not just in the United States. We also will see such actions brought by Canada and Germany and Japan and Australia and Spain and England and others as well. The DOJ and the FBI and governments and private companies from around the world will work together to implement this program. These enforcement and litigation programs will extend to various other Chinese companies. The charges against Huawei should be seen as the first, not the last.
Most U.S. companies previously were reluctant to take this sort of aggressive action against China IP theft because of concerns doing so would impact their business in China. They feared a “tit for tat” response by the Chinese government. With the deterioration of US-China relations, this concern seems to be melting away and decades of pent-up resentment against China’s IP practices could well spill out in a cascade of claims from the US and the EU and others.
Welcome to the New Normal.
UPDATE: It took less than 24 hours to prove out the above. See FBI charges second Apple employee with stealing autonomous car secrets.