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U.S. v. Liew: Feds Expand Indictment to Include Chinese State-Owned Pangang Group

 
by John Marsh 10. February 2012 14:30

In an unprecedented move, federal prosecutors have indicted Pangang Group Company Limited, a company owned and controlled by the Chinese government, as well as and one of its Chinese executives, in a high profile criminal trade secret case in San Francisco.  In essence, the U.S. Attorney for the Northern District of California has decided to indict China for the theft of DuPont's trade secrets for the process and manufacture of titanium dioxide (TiO2), a commercially valuable white pigment that is used in a large number of materials ranging from paints to plastics to paper and is particularly valuable in military and aerospace applications. 

The indictment quickly follows the U.S. government's successful opposition to the release of Walter Liew, a California businessman whom the government has also indicted for, among other things, conspiracy to steal trade secrets, attempted economic espionage and witness tampering.  I have attached a copy of the 77-page amended indictment below, as well as the original indictment against Liew and his wife, Christina Liew.
 
If there is any doubt that this is a cannon shot across the bow, one need only read the opening sentence of the amended indictment: "The People's Republic of China publicly identified the development of chloride-route titanium dioxide (TiO2) production as a scientific and economic priority."  The indictment goes on to describe Pangang Group as a state-owned enterprise controlled by government agencies of China and run by officials of the Communist Party of China.
 
The case unfolded shortly after DuPont sued Liew in Northern California last April and notified federal authorities of its concerns.  On August, 23, 2011, federal prosecutors indicted Liew and his wife, accusing them of providing false statements to federal authorities and obstructing justice in connection with their investigation of the possible theft of DuPont's titanium dioxide.  During the course of the search of the Liews' home, the FBI found a "trove" of letters and correspondence establishing that Liew was in the process of securing DuPont's TiO2 processes and data to sell to Chinese companies.  It is this trove that led to the amended indictment against the Liews, Pangang Group, its subsidiaries, and its Vice President of the Chloride Process TiO2 P roject Department, Hou Shengdong.
 
According to one of the prosecutor's filings, Liew "was tasked by representatives of the [Chinese] government to obtain technology" for building titanium factories, and "obtained that technology from former DuPont employees and sold it to companies controlled by the [Chinese] government."  Liew is alleged to have paid former DuPont engineers for assistance in designing the TiO2 processes at issue, and in turn secured contracts with Pangang Group and others for $5.6 million, $6.2 million and $17.8 million.
 
In addition to naming a state-owned manufacturer, there are a number of other interesting twists to this case.  For example, according to the Wall Street Journal and Reuters, one of the key witnesses killed himself last week. That witness, Tim Spitler, was a former DuPont engineer who had testified that he discussed secret DuPont documents with Liew.  In addition, according to the Wall Street Journal, two executives of Pangang were detained and prevented from leaving the U.S. so that the government could obtain testimony about the Liews.  However, they were released to return to China after securing their testimony, a curious decision given the undeniable thrust of the indictment directed toward Pangang Group and the Chinese government.
 
As I noted yesterday in briefly describing media reports of the indictment, I can't recall a criminal case that so directly asserted that the Chinese government had a role in the trade secret allegations at issue, let alone one that actually indicted a state-owned company.  Most, if not all, of the recent prosecutions have been against individuals.  The timing of this decision is of equal significance.  Vice President Xi Jinping, who is widely expected to be promoted to the Chinese Communist Party chief later this year, is visiting the U.S. next week to discuss a host of diplomatic, economic and policy differences with President Obama and others. 

The Obama administration has not been shy about expressing its concerns about China's role in economic espionage: Last October's report by the Office of the National Counterintelligence Executive found that China was the largest source of attacks on U.S. businesses, and accused Chinese intelligence of being a "persistent collector" of data stolen from U.S. companies.  It also follows the conviction of Hanjuan Jin, a Chinese-born American, on Wednesday, February 8, 2012, for the theft of trade secrets from Motorola (the court, after a bench trial, rejected the government's Economic Espionage Act charges).
 
So what does all of this mean? At minimum, it signals an escalation in the increasingly bitter charges and counter-charges that the U.S. and China have lobbed against one another over the past decade. It will be interesting to see what the next step is in the criminal proceeding, as well as in the broader dialogue between the two governments.

United States of America v- Walter Lian-Heen Liew- et al-0-002.pdf (3.07 mb)

United States of America v- Walter Lian-Heen Liew- et al-0-001.pdf (346.27 kb)

 

Better Read the Fine Print: Are We All at Risk Under the Computer Fraud and Abuse Act?

 
by John Marsh 23. November 2011 10:30

If you fail to comply with the fine print found within the Terms of Service of an online agreement, have you committed a crime? That is the troubling question raised by increasingly broad interpretations of the acts sufficient to trigger a criminal action (or civil claim) under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030.
 
In an interesting post entitled "Lie about your age ... Steal a trade secret ... It's all criminal," the Non-Compete Trade Secrets blog posits that failing to follow some of the broadly written and mundane Terms of Service provided by many websites could, in the wrong circumstances, be enough to justify an indictment by an overzealous prosecutor.  Orin Kerr, professor and author of the Volokh Conspiracy Blog, has also written about the potential for abuse in his blog and in a recent op-ed piece in the Wall Street Journal.  Their concerns arise from recent decisions expanding one of the critical prongs of the CFAA -- whether a defendant "exceeded authorized access" of a protected computer.
   
The most noteworthy of these decisions is the Ninth Circuit's recent holding in U.S. v. Nosal,  642 F.3d 781 (9th Cir. Apr. 28, 2011).  In that case, the Ninth Circuit held that the violation of a computer use policy that placed "clear and conspicuous restrictions on the employees’ access” to the employer’s computer system and the specific data at issue could be enough to qualify as conduct that exceeded authorized access. The Northern District of California has since applied Nosal's reasoning to online agreements, at least in a civil dispute between commercial parties. In Facebook v. MaxBounty, Case No. CV-10-4712-JF (N.D. Cal, Sept. 14, 2011), that district court found that a violation of Facebook's terms of use could qualify as access without authorization under the CFAA.
 
It's not just lawyers musing about the implications of these decisions. Even the Wall Street Journal has chimed in, expressing concern that the proliferation of online agreements that many of us mindlessly click and accept could trigger a violation of the CFAA. For example, supplying the wrong age, height or weight in a profile for a dating website might qualify as a violation of the CFAA because you may have agreed not to provide inaccurate or misleading information to the website. And this does not even account for the fact that many of these online agreements reserve the right for the provider to change those Terms of Service without notice at their discretion.
 
Naturally, federal prosecutors dismiss such fears.  According to the WSJ, Richard W. Downing, deputy chief of the Computer Crime & Intellectual Property Section at the Justice Department’s Criminal Division recently testified that such fears were “unsubstantiated.” According to Downing, the Justice Department would not “expend its limited resources on trivial cases such as prosecuting people who lie about their age on an Internet dating site.” The problem, however, is that not that prosecutors will pursue everyone, but that they have the discretion to pursue anyone.
 
The tide may be turning. While Nosal was initially applauded by many in the trade secret community because it would bolster employers' protections under the CFAA, libertarian groups such as the Electronic Frontier Foundation argued that Nosal could criminalize the very acts outlined above as violations of broadly written Terms of Service. Perhaps as a result of those arguments, the Ninth Circuit indicated on October 27, 2011 that it will rehear Nosal en banc and noted that in the meantime Nosal was not to be used as precedent in the meantime.
 
I have to agree with the commentators on this one.  Isn't the correct question what did Congress intend to prohibit when it enacted the CFAA?  I have not burrowed into the legislative history, but is difficult to imagine that the CFAA was supposed to govern a consumer's failure to follow the fine print in an online licensing or terms of use agreement.
 

DuPont v. Kolon Industries: Deletion of E-mails Leads to Sanctions and Spoliation of Evidence Instruction

 
by John Marsh 25. July 2011 17:00

Charges of spoliation of evidence are frequently levelled in trade secret cases but rarely result in formal judicial findings of misconduct and sanctions. That may be changing. Last week, on the eve of jury selection, the U.S. District Court for the Eastern District of Virginia in Richmond found that key employees of the defendant, Kolon Industries, Inc., deliberately deleted emails and other evidence and engaged in prolonged efforts to conceal that conduct. The district court has sanctioned Kolon by ordering that an adverse inference instruction will be given to the jury and has awarded DuPont its attorneys fees in connection with the motion. (A special thanks to Mark Klapow for bringing this ruling to my attention).
 
This case has been the subject of significant media coverage already and is shaping up to be the East Coast version of the Mattel/MGA dispute. For the uninitiated, DuPont sued Kolon, a company with its headquarters in South Korea, in February 2009, claiming that Kolon had misappropriated trade secrets relating to the body armor, Kevlar, after Kolon hired a former DuPont employee, Michael Mitchell. 

While working with Kolon, Mitchell served as a go-between with other former DuPont employees and he ferried various DuPont trade secrets to Kolon. After DuPont discovered Mitchell's actions, it notified the FBI and Department of Commerce, who then launched their own investigations. Mitchell ultimately pled guilty to theft of trade secrets and obstruction of justice. 
 
The Virginia ip Law Blog has a thorough summary of the case, which has generated over 1,200 pleadings and orders. There have been a number of noteworthy rulings that have garnered commentary, ranging from rulings relating to the viability of Kolon's antitrust claim against DuPont to a recent decision finding the Department of Justice and DuPont did not improperly collude in connection with subpoenas used to gather evidence for the prosecution.

Not surprisingly, given the scope of this case, the July 21, 2011 Order (a link for which is below) is not light reading and spans 91 pages. After finding misconduct by a number of key employees, the district court declined to enter a default against Kolon because of two relatively prompt litigation holds and because the company itself had not systematically engaged in the misconduct. Nevertheless, the district court did find that a number of key employees who interacted with Mitchell deliberately, willfully and in bad faith deleted a substantial amount of emails immediately after the filing of the complaint; it further found that they also set upon a course to conceal their conduct from the court and DuPont. Balancing the fact that many of the emails were recovered while many others were not, the court found that there was more than adequate grounds for a spoliation jury charge.

On these facts, the district court concluded that the best remedy was "to inform the jury that certain Kolon executives and employees, after learning that DuPont had sued Kolon, deleted much electronically stored information that would have been available to DuPont for use in presenting its case." The district court further held that the "jury then should be allowed to infer that the recoverable deleted information would be helpful to DuPont and harmful to Kolon." Finally, the district court ordered that "jury should be told that the fact of deletion, without regard to whether the deleted material was recovered, may be taken into account in assessing the element of Kolon's intent and knowledge" (Opinion at pp. 87-88).

The takeaway? Litigation holds may provide a corporate defendant with some protection but there needs to be follow through within the company to ensure that the litigation hold is not only distributed to the appropriate employees but that it is also followed by those employees. Special care may also need to be taken with key employees located outside the U.S., who may not be as familiar with the severe consequences of preserving email and other electronic information in U.S. litigation.

 DuPont v. Kolon Spoliation Order.pdf (2.24 mb)

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

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