Obama Administration Focuses on Chinese Trade Secret Misappropriation

Article co-written by Yuri Levin-Schwartz, Ph.D., a law clerk at MBHB.

Since President Obama entered the White House in 2009, his administration has undertaken a number of steps toward stricter policing of international trade secret misappropriation. Those efforts reached a turning point early this year with the release of the “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets”[1] (the “Administration Strategy” or “Strategy”). At the same time, however, news reports have suggested that the Chinese government has facilitated – and even been responsible for – the misappropriation of U.S. trade secrets. As a result, the Obama Administration has ramped up efforts to protect trade secrets against Chinese misappropriation.

Early Administration Efforts on Trade Secret Misappropriation

During the first term of the Obama Administration, there were a number of efforts to focus on the protection of trade secrets. High among these efforts was the creation of the office of the U.S. Intellectual Property Enforcement Coordinator (“IPEC”), pursuant to the “Prioritizing Resources and Organization for Intellectual Property Act of 2008”[2] (the “PRO-IP Act”). The IPEC is charged with coordinating the work of the numerous Federal agencies that prevent intellectual property theft, including in the form of patent, trademark, and copyright infringement, as well as trade secret misappropriation. Since the inception of the IPEC office, it has been headed by Victoria Espinel, a former Assistant U.S. Trade Representative for Intellectual Property and Innovation, law practitioner, and law professor.

After Ambassador Espinel’s confirmation as the IPEC, she set about coordinating governmental efforts and soliciting public comments on the enforcement of intellectual property rights. In June 2010, as directed by the PRO-IP Act, she issued the “Joint Strategic Plan on Intellectual Property Enforcement”[3] (the “Joint Strategic Plan”). Although much of the Joint Strategic Plan related to patent, trademark, and copyright infringement, it set forth a plan of action in international trade and diplomatic relations, as well as domestic policing that served as a model for the Administration Strategy.

As the IPEC was developing the Joint Strategic Plan, the U.S. International Trade Commission (“ITC”) undertook an investigation of trade secret misappropriation by Chinese railway wheel manufacturers brought by Illinois-based Amsted Industries, Inc. That investigation culminated in the U.S. Court of Appeals for the Federal Circuit’s decision in TianRui Group Co. v. Int’l Trade Comm’n, 661 F.3d 1322 (Fed. Cir. 2011). A full recap of the TianRui decision is available in the Fall 2012 edition of Snippets,[4] but at least three holdings in the decision have been critical for more recent trade secret enforcement efforts. First, the Federal Circuit affirmed that the ITC’s jurisdiction included trade secret misappropriation claims. Second, it found that the governing law of such claims would be Federal common law, not the law of any state (or any foreign country). Third, the majority of the Federal Circuit panel held that the general assumption against the extraterritorial application of U.S. law would not apply to ITC trade secret misappropriation investigations, even if all of the acts of misappropriation occurred overseas. Thus, the TianRui decision provided an additional weapon in a domestic trade secret owner’s enforcement arsenal.

The Administration Strategy on Mitigating the Theft of U.S. Trade Secrets

On February 20, 2013, Ambassador Espinel announced the launch of the “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets.”[5] Demonstrating the importance of a coordinated effort, she was joined at the launch event by the Attorney General; representatives of the Departments of Commerce, State, and Justice; and representatives of the Offices of the U.S. Trade Representative and Director of National Intelligence.[6]

The Administration Strategy is a five-pronged approach, coordinated by the IPEC and involving many of the executive branch departments.

First, the Strategy calls for the White House to focus diplomatic efforts to protect trade secrets overseas.[7] Although the Administration Strategy does not expressly identify any specific countries on which it is focused, the examples of misappropriation of trade secrets for the benefit of foreign companies and countries are almost exclusively Chinese. As discussed below, however, it appears that the Chinese government may be complicit in misappropriation of trade secrets. Thus, while the Strategy calls for sustained and coordinated international engagement with trading partners, such as China, it may be difficult for the Federal agencies charged with doing so (including the Departments of Commerce, Defense, Homeland Security, Justice, State, and Treasury, and the U.S. Trade Representative) to make much headway. The Administration may find more success in the Department and PTO working with other countries through Intellectual Property Rights (“IPR”) working groups to fashion rules and policies to discourage trade secret theft. The Strategy also calls for domestic law enforcement agencies to leverage international law enforcement cooperative agreements and arrangements to pursue investigations both in the U.S. and abroad.

Second, the Strategy calls for the U.S. IPEC to promote voluntary best practices by private industry to protect trade secrets.[8] While the IPEC will work with the Departments of Justice and State (among other agencies) to encourage companies and industry groups to develop and implement voluntary best practices, the Administration Strategy expressly indicates that those best practices must be consistent with antitrust laws. Among the areas in which the Strategy suggests focus are R&D compartmentalization, information security, physical security, and human resources policies. But the Strategy makes it clear that compliance with best practices must be voluntary, and any identified best practices may not be suitable for all companies.

Third, the Strategy calls for the enhancement of domestic law enforcement operations.[9] Spearheaded by the Attorney General’s Task Force on Intellectual Property and the FBI, the Department of Justice is making the investigation and prosecution of corporate and state-sponsored trade secret theft a higher priority. The Office of the Director of National Intelligence will also coordinate the sharing of intelligence among the intelligence and law enforcement communities in order to monitor foreign government activity and prevent international trade secret misappropriation, and will also work with the private sector to warn of potential threats.

Fourth, the Strategy calls for the Administration to improve domestic legislation.[10] This is one area where there has been concrete (although incremental) progress in recent months. The Strategy highlighted two acts passed at the conclusion of the last Congress. First, the “Theft of Trade Secrets Clarification Act of 2012” (the “Theft of Trade Secrets Act”)[11] was intended to reverse the outcome of cases like U.S. v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), in which the defendant stole the source code for a proprietary high-frequency trading system from his former employer to provide it to a new employer, but was acquitted because the source code was intended to remain secret and therefore not “related to or included in a product that is produced for or placed in interstate or foreign commerce.” The Theft of Trade Secrets Act modified the Economic Espionage Act (“EEA”) to cover trade secrets “related to a product or service used in or intended for use in interstate or foreign commerce.”[12] Second, the “Foreign and Economic Espionage Penalty Act of 2012”[13] did exactly that: increased potential sentences and fines for violations of the EEA. Further, the Strategy charges the IPEC with coordinating an initial review of existing Federal laws within 120 days of the release of the Administration Strategy, by June 20, 2013.

Finally, the Strategy calls for various departments in the Administration to increase efforts to develop public awareness and engage in stakeholder outreach.[14] For example, the FBI and Department of Commerce are to continue and expand their efforts to inform the public about the threat and cost of trade secret misappropriation, using existing public awareness programs. In addition, the PTO will include discussion of the economic implications of trade secret misappropriation in its “road show” events.

All in all, the Administration Strategy suggests a greater focus on protection of trade secrets against foreign misappropriation, as well as a more coordinated effort than in the past.

Efforts Since the Launch of the Administration Strategy

On the eve of the release of the Administration Strategy, Mandiant Corporation, a private U.S.-based cybersecurity firm issued a report identifying the Chinese government (specifically, a military unit based in Shanghai) as being one of the causes of Chinese cyberattacks.[15] Specifically, Mandiant identified Advanced Persistent Threat 1 (“APT1”) as the most prolific cause of computer security breaches around the world, and concluded that APT1 was a unit of the Chinese Army based in Shanghai. The report was widely reported in the press and, although denied by the Chinese government, has served as an important backdrop to Obama Administration statements since the issuance of the Administration Strategy.

Three weeks later, National Security Advisor Tom Donilon said that U.S. businesses are increasingly speaking out about cyber theft of confidential business information from entities in China “on an unprecedented scale” and that the Chinese government “should take serious steps to investigate and put a stop to these activities.”[16] Donilon’s comments were a substantial change from past avoidance of criticism of China on the issue, and he noted, “From the President on down, this has become a key point of concern and discussion with China. And it will continue to be.”[17] The Obama Administration has followed up with high-level meetings between Treasury Secretary Jacob Lew and Chinese officials.[18]

In parallel to the Administration’s public statements and diplomacy, Congress passed a continuing budget resolution (the “Consolidated and Further Continuing Appropriations Act, 2013”) that included a provision at § 516 intended to prevent potential Chinese misappropriation of trade secrets from the Federal government. [19] More particularly, in § 516(a), the budget resolution required the FBI to make an assessment of the risk of cyber-espionage or sabotage associated with the acquisition of any information technology (“IT”) system by the Departments of Commerce and Justice, NASA, or the National Science Foundation “including any risk associated with such system being produced, manufactured or assembled by one or more entities that are owned, directed or subsidized by the People’s Republic of China.” In § 516(b), those departments are prohibited from purchasing any IT system from such Chinese entities, unless the head of the assessing agency “determines, and reports that determination to the Committees on Appropriations of the House of Representatives and the Senate, that the acquisition of such system is in the national interest of the United States.” Thus, the continuing budget resolution prohibits the purchase of IT equipment from Chinese companies –potentially including telecommunications companies such as Huawei and ZTE – unless the national interest outweighs the threat of cybertheft.

Finally, the IPEC concurrently requested public input on improving Federal laws protecting against trade secret misappropriation. On March 19, 2013 Ambassador Espinel published a notice in the Federal Register “requesting any recommendations for legislative changes that would enhance enforcement against, or reduce the risk of, the misappropriation of trade secrets for the benefit of foreign competitors or foreign governments.”[20] The notice was in furtherance of the fourth prong of the Administration Strategy, and comments from the public were due by April 22, 2013. Among other suggestions, the Intellectual Property Owners Association (“IPO”) proposed the addition of a civil cause of action to the EEA.[21] The comments received by the IPEC will help shape proposed legislation to prevent trade secret misappropriation, both by Chinese entities and by others overseas.

Because China is seen as the biggest threat for foreign trade secret misappropriation, much of the Obama Administration’s efforts have been focused on it. That focus is not only going to continue, it is likely to intensify in coming days as the Administration implements the Administration Strategy.

© 2013 McDonnell Boehnen Hulbert & Berghoff LLP

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[4] https://www.mbhb.com/pubs/xpqPublicationDetail.aspx?xpST=PubDetail&pub=243.

[5] See Administration Strategy.

[6] See id.; see also http://www.whitehouse.gov/blog/2013/02/20/launch-administration-s-strategy-mitigate-theft-us-trade-secrets.

[7] See Administration Strategy at pp. 3-5.

[8] See id. at pp. 6-7.

[9] See id. at pp. 7-10.

[10] See id. at pp. 11-12.

[11] http://www.gpo.gov/fdsys/pkg/BILLS-112s3642enr/pdf/BILLS-112s3642enr.pdf.

[12] Id.

[13] http://www.gpo.gov/fdsys/pkg/BILLS-112hr6029enr/pdf/BILLS-112hr6029enr.pdf.

[14] See Administrative Strategy at p. 12.

[15] http://intelreport.mandiant.com; http://www.washingtonpost.com/world/report-ties-100-plus-cyber-attacks-on-us-computers-to-chinese-military/2013/02/19/2700228e-7a6a-11e2-9a75-dab0201670da_story.html.

[16] http://articles.washingtonpost.com/2013-03-11/world/37620683_1_mandiant-china-source-code; http://www.cbsnews.com/8301-202_162-57573678/u.s-to-china-put-an-end-to-cybertheft/.


[17] http://articles.washingtonpost.com/2013-03-11/world/37620683_1_mandiant-china-source-code.

[18] http://www.huffingtonpost.ca/2013/03/28/us-takes-1st-swipe-at-chi_n_2968474.html.

[20] 78 Fed. Reg. 16875 (Mar. 19, 2013).

[21] http://www.ipo.org/wp-content/uploads/2013/04/2013.04.22_Trade-Secrets-Letter-re-Leg-Similar-to-S3389.pdf.