Chinese cyberespionage: Lessons from two trials

Days before Chinese President Xi Jinping arrives in Washington, rumors are flying of pending US government indictments and sanctions against Chinese companies and individuals who have stolen trade secrets or intellectual property from US companies or have benefited from such thefts. It is certainly time for the Obama administration to move against repeated Chinese lawbreaking, but the history of two current legal actions raises significant cautionary warnings.

There are two lessons here:

1. The US government and/or private litigants had better have their facts down precisely.
2. They had better be prepared in many instances to slog through long and complicated judicial proceedings. The US government must also be ready to speak up more frequently and with greater dispatch against Chinese regulators’ blatant bias and discrimination against foreign competitors.

Case 1: The Chinese spy that wasn’t

For the US Justice Department – as it prepares to throw down the gauntlet on alleged Chinese economic espionage – the last thing it wanted was for the front page of Saturday’s New York Times to read: “US Drops Charges That Professor Shared Technology With China.” The defendant was Professor Xi Xiaoxing, a naturalized US citizen from China and chairman of the physics department at Temple University. In May of this year, FBI agents, with guns drawn, came to his house and took him away in handcuffs. He was charged with sharing sensitive American technology with China. Temple placed him on administrative leave and relieved him of his department chairmanship.

The technology at issue is called a “pocket heater,” a device used in superconductor research to overlay one substance with a thin coating from another material. It turned out that the diagrams Professor Xi had shared were not those of the sensitive pocket heater at all, but rather a different device, according to a number of sworn statements by other US scientists. After months of deliberating, the Philadelphia district attorney dropped the case “in the interests of justice.”

In spite of the scientific complexity of the case, astonishingly it appears that the Justice Department failed to consult with other leading experts in the field. As the Times story concludes: “Dr. Xi’s case, coming on the heels of a similar case that was dismissed a few months ago in Ohio, raises questions about whether the Justice Department, in its rush to find Chinese spies, is ensnaring innocent American citizens of Chinese ancestry.” And of course, the Chinese press was quick to pick up the story, with the China Daily piously slamming “United States’ paranoia about China.”

(That this episode constitutes an “unforced error” on the part of Justice officials should not, however, obscure the real threat of Chinese cyberespionage – DOJ has successfully prosecuted Chinese citizens for stealing acoustical equipment aircraft technology and specialty seeds from US commercial companies.)

Case 2: It’s complicated

The second case – reported in great detail in Monday’s Washington Post – involves a US company, Vringo, which is suing the Chinese telecoms giant, ZTE, for refusing to pay adequate patent license fees. (Ironically, Vringo is itself a business often labeled a “patent troll” by US tech firms.)

Without delving too deeply into the legal details, the following facts are relevant. First, such patent cases (even without the complications of dealing with a Chinese company) are complex and often result in extended litigation across a number of jurisdictions. The two companies are also going at it in Germany (ZTE win) and Britain (Vringo win). Second, litigation with a Chinese company brings into play the techno-nationalist administrative and judicial apparatus in Beijing. In this case, the National Reform and Regulatory Commission has nakedly intervened to aid ZTE, including threats to seize Vringo’s assets and exclude Vringo employees from entering China. The current licensing fee case is being heard in a New York federal district court. ZTE is also involved in a potential proceeding related to a charge that it sent millions of dollars of banned surveillance equipment to Iran. The company has refused to bring its general counsel to New York in the patent case, as it fears he might be questioned or detained on the Iran case.

What US officials should be telling President Xi

Here are the lessons in this admittedly complicated litigation. Despite appearances, there is no special role for the Obama administration in the patent-licensing case itself. In its defense, ZTE has pointed out that it has signed many successful patent-licensing agreements with major leading multinationals, such as Ericsson, Microsoft, Siemens, and Qualcomm. So let the case play out.

But the administration should step in to vigorously attack the biased Chinese regulatory regime, with Vringo as Exhibit A. Beginning with President Xi’s visit, White House officials should be prepared with chapter and verse relating to the brazen favoritism and flouting of due process by regulatory agencies such as the National Reform and Regulatory Commission. This should be accompanied behind the scenes by a firm warning that, without change, the business environment and prospects for Chinese firms in the United States will become increasingly fraught.