Podcast: Conductive Discussions Episode 2: Criminal Prosecution of Trade Secret Theft, with a Focus on China
This Ropes & Gray podcast series, “Conductive Discussions,” focuses on legal issues of interest to the semiconductor industry. In the second episode of the series, IP litigation partner Mark Rowland, litigation & enforcement partners Colleen Conry, Mimi Yang and counsel Tony Biagioli, and IP litigation associate Daniel Richards, discuss recent trends in criminal prosecution of trade secret theft, with a focus on China. This podcast also includes SiliconSpeak, a report of recent legal news in the semiconductor industry.
Mark Rowland: Welcome to our second episode of Conductive Discussions, a Ropes & Gray podcast series focused on legal issues of interest to the semiconductor industry. My name is Mark Rowland, and I am a partner at Ropes & Gray in our IP litigation practice, based in our Silicon Valley office. I'll be hosting this episode, which will focus on recent trends in trade secret protection. We will be hearing from an exciting and wide-flung group of practitioners on this topic. With me is Colleen Conry, a partner in our Washington, D.C. office, whose practice concentrates on representing multinational corporations in connection with government investigations and criminal prosecutions. Colleen worked for several years in the United States Department of Justice, in both the criminal and civil branches. In addition to Colleen, Tony Biagioli hails from our D.C. office as well. Tony is counsel in Ropes & Gray’s litigation & enforcement practice and is an award-winning author on corporate criminal liability for theft of trade secrets. Also joining us is Ropes & Gray partner Mimi Yang, participating from our Hong Kong office. Mimi has extensive experience in litigation and government enforcement matters, and helps guide companies through the challenges of doing business in China and Asia more broadly. And finally, we have with us Daniel Richards, an outstanding associate in our IP litigation practice, based here with me in our Silicon Valley office. Daniel will start us off with our SiliconSpeak report of recent legal news. Daniel.
Daniel Richards: Thanks, Mark. Hi, everyone. This is Daniel Richards sitting with Mark in Ropes & Gray's Silicon Valley office with your latest news from the semiconductor industry. In semiconductor securities fraud news, on Wednesday, April 10, 2019 the United States Security and Exchange Commission filed a complaint in the central district of California. The SEC alleged that Yuh-Yue Chen, a former engineer at Skyworks Solutions, stole private financial information, which Chen then used to profit by buying up shares before Skyworks announced positive quarterly financial results in both April and July of 2014, and then selling the shares after those results were announced. According to the SEC, Chen was caught sneaking into the financial department of Skyworks without authorization, despite Skyworks policies and quarterly reminders about the company's insider trading policy. According to the SEC's complaint, through the scheme Chen apparently sold Skyworks’ securities for almost $800,000. When he was caught, Chen ran out of the office building and then fled to Taiwan.
Moving on to news about semiconductors in the PTAB. On Thursday, April 4, 2019 the Federal Circuit affirmed two Patent Trial and Appeal Board decisions that had found claims from two flash memory patents asserted against Micron Technology, Inc. by Innovative Memory Solutions, Inc. obvious. The two patents that were the subject of the Federal Circuit's decision related to a system for reducing the effect of coupling between adjacent floating gates of a non-volatile storage and the isolation of tightly packed elements in semiconductors structures respectively.
And now, switching over to news on the insurance front. On Thursday, March 28, 2019 a jury in the Western District of Washington ruled against Cypress Insurance Company's claim to recover $62 million from SK Hynix America, Inc. in a bid to recover $150 million that Cypress had to pay to Microsoft over chip shortages. Cypress told the jury that Hynix had under-allocated its output to Microsoft and failed to provide buffers of inventory. However, the jury found that Hynix had provided Microsoft the amount of DRAM chips that the two had agreed upon – the claim related to the chip shortages that complicated Microsoft's 2013 launch of the Xbox One. And that's it for this episode's news segment. For links to the news stories I just told you about, please check out the newsroom page on ropesgray.com. Tune in next time for more updates from the wonderful world of semiconductor news. Back to you, Mark.
Mark Rowland: Thanks, Daniel. Now we're going to transition into our discussion about trade secrets. Colleen, can you start that discussion?
Colleen Conry: Sure, Mark. Just to set the stage, I thought it'd be helpful to begin with a review of the government's enforcement focus. Mimi, what can you tell us about the government's approach to enforcing trade secrets laws?
Mimi Yang: Thanks, Colleen. So the Economic Espionage Act, or EEA, became law in 1996. The EEA criminalizes theft of trade secrets both to benefit a foreign government or to benefit anybody else. Since its inception, the government has brought an increasing number of cases. So 7.2 cases per year on average from about 1996 to 2009, 8.6 per year from 2009 to 2017, and we see a huge uptick in the last couple of years to 11 per year from 2017 to the present. The government is also increasing its focus on non-U.S. entities. So in 2009, the government brought 45% of its EEA cases against non-U.S. defendants. By 2015, that number was 83%, so a huge increase. China, particularly, has fallen squarely within the government's crosshairs, far more than any other country. In fact, seven of the 11 new criminal cases over the last year involve China. Just for those new cases, the industry focus is quite broad, and the common link is simply China. So industries and products at issue include pharmaceuticals, including dynamic random-access memory, aerospace, turbines, driverless car technology and even rice seeds. And one interesting case that actually includes the semiconductor industry is U.S. v. Chen. Here, in this matter, employees at a Silicon Valley-based semiconductor manufacturer allegedly conspired to steal the technology for use by a competing company to be based in both the U.S. and China. Defendants downloaded information relating to the technology from their employer's confidential internal engineering database, including over 16,000 drawings. They shared plans in multiple emails describing their plans to use the technology in a new startup company, and attempted to recruit investors in order to fund the new startup.
Colleen Conry: Mimi, you mentioned a focus on China. Can you tell us a little bit about DOJ's China initiative?
Mimi Yang: Absolutely. So the China initiative was launched by the DOJ in November of last year, 2018. It's an enforcement sweep targeted at Chinese companies and individuals. The DOJ's announcement stood out to many of us in this space not only for its unequivocal focus on China,, but also the severity of its language directed at the country. For example, a few choice quotes: “Enough is enough.” “We're not going to take it anymore.” “This is unacceptable.” “The cheating must stop.” “China cannot be a safe haven for criminals”. “China is known around the world as a dishonest regime running a corrupt economy.” That's all very severe language. The takeaway here is that the U.S. government is focused like a laser on China when it comes to trade secrets theft. This is relevant both to companies accused of trade secrets theft as well as companies who believe their IP has been stolen—because at its core, this speaks to where the government is likely to focus its enforcement resources.
Colleen Conry: Mimi, the definition in a criminal prosecution recently changed. Can you tell us about that?
Mimi Yang: Sure. So in May 2016, Congress passed the Defend Trade Secrets Act, or the DTSA. Among other things, the DTSA created a federal private civil right of action for trade secrets theft. The DTSA amended the definition of trade secret previously applicable in criminal cases. This change actually matters greatly because it altered the potential for criminal liability where there were previous disclosures of the alleged trade secrets to third parties. So under the old definition, it was possible to disclose a trade secret to a competitor, and so long as the information was not available to “the public,” prosecutors could argue that the information remained a trade secret. This was bad for defendants. A stark example was Chinese national Walter Liew, who was convicted of stealing DuPont's titanium dioxide trade secrets and actually sentenced to 12 years in prison. The trade secrets at issue there had been disclosed to various parties, but not to “the public.” The courts in that case held that the information remained a trade secret and affirmed Liew's conviction. Under the new definition, however, the outcome might be different. So if the third parties to whom the information was disclosed were parties who could obtain economic value from that information, courts might hold that the information is no longer a trade secret, and misappropriation of that information might not violate the EEA.
Colleen Conry: Without question, criminal trade secrets law has numerous idiosyncrasies. It's common for companies to misunderstand what precisely violates the law. Tony, what are the most common misperceptions about criminal trade secrets law?
Tony Biagioli: It is certainly unlawful to use a stolen trade secret. It is certainly unlawful to steal a trade secret, even if you don't use it. And I think most people understand that, but it is also expressly unlawful to attempt or conspire to steal a trade secret. For example, we have seen cases where a company's R&D department is discussing internally how difficult it is to make a particular product, and states it would be great to find out how a competitor does it, and then hires the competitor's former employees. Depending on the facts and circumstances, the DOJ may take the position that this constitutes a sufficiently substantial step in furtherance of a criminal attempt to steal trade secrets. One other misconception relates to corporate criminal liability. The company itself can be liable for its employees' and agents' acts even when senior company personnel didn't know about the misconduct, and even when the misconduct was contrary to express corporate policies and express company instructions. And you and I know this well, Colleen, from our work on certain matters. Finally, the criminal penalties in these cases can be significant. Mimi mentioned Walter Liew's 12-year prison sentence—these prison sentences can be as high as 15 years, and for companies, fines can be up to as high as three times the value of the stolen trade secret. So those numbers can get very big, very quickly.
Colleen Conry: So let's talk about how to mitigate that risk. One recommendation we frequently make to companies is to draft and implement robust compliance policies to respect third party trade secrets. These should include hiring controls, representations and warrantees in agreements with employees and agents, and detail protocols for dealing with information that could violate a third party's IP. We've drafted these with some of our core clients. Tony, how can having robust policies and procedures help a company facing a criminal investigation?
Tony Biagioli: It's funny, most companies have procedures to protect their own intellectual property. Many do not have procedures to respect others' intellectual property. And in front of the DOJ, if you are accused of trade secrets theft, those aren't good optics. So there are three principal advantages to having strong policies and procedures to respect the intellectual property of third parties. First and foremost, it can deter and prevent misconduct in the first place. Second, it can affect prosecutors' discretion whether to bring the case. The DOJ's justice manual treats trade secrets uniquely. Given potential civil remedies, not every violation should be treated as a crime. If a company has strong and robustly enforced procedures, it can help counsel argue to the DOJ that this is a good company who shouldn't fall within the DOJ's crosshairs. And finally, in the event of a criminal resolution, strong compliance policies can affect the fine amount under the U.S. Sentencing Guidelines. Finally, in terms of exculpating companies from liability, the law for companies is very tough here, as noted. But several courts have noted in dicta that sufficiently strong procedures can potentially be relevant to a corporation's underlying liability.
Colleen Conry: One of the greatest challenges for companies is determining what to do when they're accused of stealing, or believe they may be in possession of, a competitor's trade secrets. What are some of the most important steps companies can take when they find themselves in that position, Tony?
Tony Biagioli: The most important thing a company can do is to act on the assumption that every responsive step taken will eventually become public, or at least become known by law enforcement. The company needs to ensure that steps they take are defensible and consistent with a lack of company knowledge, a lack of company authorization of the misconduct, and no intent by the company to misappropriate trade secrets. One of the most important things a company can do is to ring-fence or segregate out the alleged competitor’s intellectual property. This can be straightforward or this can be challenging, depending on the circumstances. A straightforward example: say a new employee is discovered with a hard drive full of confidential materials from a previous employer. There is no evidence that the information has been used. Potential immediate steps the company might take include: (i) Seize and restrict access to the information, so seize the hard drive and don't let anyone access it. (ii) Ensure that no one uses the information. And (iii) Limit the new employee’s work pending further factual development and consultation with counsel.
Colleen Conry: So Mimi, what if it's not that straightforward? Can you think of an example presenting greater challenges?
Mimi Yang: Absolutely, Colleen. We can think of a number of different scenarios, but I'll just give one example. So here, company A hired a consultant several years ago. Company A then receives a subpoena from U.S. authorities that appears to reflect an investigation into whether the consultant provided company B's trade secrets to company A. Company A then develops its own production process based on the information that the consultant provided. Company A is now actively producing and selling goods manufactured from that process. So what do we do here? So some potential immediate first steps: Assess the feasibility of pausing production for company A, or at least continuing production without using the competitor's trade secrets pending an internal investigation by outside counsel and advice of outside counsel. And if this is not feasible, then obviously the company should promptly and rapidly investigate the allegations and then negotiate from authorities from there.
Colleen Conry: Well, then, of course, we have a whole separate set of considerations for companies who believe they're the victims of trade secrets theft. What are some of the options available to companies who find themselves in that position?
Mimi Yang: Yes, so there are both criminal and civil remedies available, as people probably know. In certain circumstances, though, disclosing the theft to criminal authorities can make sense. So for example, where the alleged perpetrator is Chinese, if the individual or entity lacks a U.S. presence, it may be difficult to sue civilly if the judgment would need to be recognized and enforced by Chinese courts. And frankly, that's a whole other podcast. In such a case, you'd have a motivated DOJ, given the China connection, with additional vehicles to address limited U.S. connections. So for instance, the FBI can apprehend these people at U.S. airports. Restitution for victims here is part of the relevant statutory scheme. In a criminal matter, the victim may need to be a witness and there may be some time or hassle associated with this. but frankly, there isn't much downside. If a victim is inclined to proceed civilly, there may be lots of strategic considerations and some trade offs to proceeding criminally, depending on the facts and circumstances. For instance, there may be diminished control over the proceedings and outcome, and there may be civil suit and disruptions. So for instance, there may be a discovery, say, in favor of the DOJ action, or there may be Fifth Amendment non-responses from some of the witnesses in the case. This is a highly complicated strategic decision that turns on the facts and circumstances.
Mark Rowland: Well, thanks, Mimi, for that. It certainly seems to me that these discussions today really can take up a lot of time for companies, and they need to spend the time to think about them. I would like to thank, in addition to Mimi, Colleen, Tony, and Daniel for joining us today, and for sharing their insights. Subscribe to Conductive Discussions and other RopesTalk podcasts in the newsroom page of www.ropesgray.com. If you have any questions or comments, just drop us a line. For more information about our practices specific to semiconductors, just type, “semiconductors Ropes Gray” to get to our semiconductors page. Thank you for listening and we hope you join us.