1. TRADE SECRETS, ECONOMIC ESPIONAGE, AND
OTHER PERILS OF DOING BUSINESS WITH
CHINA
Brian A. Sun
Partner, Jones Day
OCEAN Speaker Series
September 18, 2012

2. Unique Challenges…
• United States: the most litigious and regulated
country in the world.
• Civil Litigation
• Criminal Prosecutions
• Historical and cultural bias against Chinese
Americans
• Dr. Wen Ho Lee
• Civil and Criminal Litigation Concerns
• Economic Espionage Act and Trade Secrets
• Foreign Investments in the United States
• Foreign Corrupt Practices Act
• Securities Litigation
• National Security
• Preventative Maintenance

3. United States: Most Litigious…

4. Civil Litigation
Unpredictable and Enormous Jury Verdicts
4

5. Civil Litigation
Unpredictable and Enormous Jury Verdicts

6. Criminal Prosecutions
6

7. Criminal Prosecutions
7

8. Criminal Prosecutions
8

9. Criminal Prosecutions
9

10. Historical And Cultural Bias Against Chinese
Americans
10

11. 11

12. Chinese American Exclusion Act of
1882
“It shall not be Lawful for any Chinese
labor to come…to remain within the United
States.”
12

13. The Red Scare
Senator Joseph McCarthy
13

14. 14

15. 15

16. DOE Director of
Counterintelligence
Secretary of
Energy

17. Dr. Wen Ho Lee

18. 18

19. Judge Parker’s Apology

20. Judge Parker’s
Apology

21. Judge Parker’s
Apology

22. Judge Parker’s
Apology

23. H.R. 683

24. Civil and Criminal Litigation Concerns
24

25.  ECONOMIC ESPIONAGE ACT AND TRADE
SECRETS
 FOREIGN INVESTMENTS IN THE UNITED STATES
 SECURITIES LITIGATION
 ENFORCEMENT
CIVIL
CRIMINAL
NEW FOCUS – CHINESE COMPANIES
 FOREIGN CORRUPT PRACTICES ACT
 NATIONAL SECURITY 25

26.  ECONOMIC ESPIONAGE ACT AND TRADE
SECRETS
26

27. What is a Trade Secret?
• Information
• Has independent economic value
• Not generally known
– To the public
– To others who can obtain economic value from
its disclosure or use
• Kept secret
27

28. Trade Secrets – What and Where Are They?
Trade Secrets are: Trade Secrets are found in:
• Formula • R & D documentation
• Pattern • Lab notebooks
• Compilation • Computer files
• Databases
• Program
• Drawings
• Device
• Rolodexes
• Method
• Whiteboards
• Technique • Email
• Process • In employees’ heads
• Customer List
• Other

29. Secrecy Efforts
Physical Facility Documents
• Security • Marked confidential
• Badges • Electronic sensors
• Limited access to site • Limit copies
• Receptionist • Passwords
• Lobby • Checkout procedure
• Escorts • Shred
• Photo ID
• Need to know access

30. Proof of Misappropriation vs. Detecting Misappropriation
Proof Detection
• Improper acquisition, • ―Dummy names‖ on
disclosure or use; customer lists ;
• Often circumstantial • Strategic typos in
documents or source
evidence;
code ;
• Place stolen materials in • Monitoring computer
defendants’ hands; systems;
• Experts may be necessary ; • Archiving hard drives
and not reassigning
computers;
30

31. ECONOMIC ESPIONAGE ACT
of 1996
It is a federal crime to steal trade secrets
• For the benefit of a foreign government (Economic
Espionage, 18 U.S.C. 1831) or
• For the benefit for anyone other than the owner of
the trade secret (Commercial Theft of Trade
Secrets, 18 U.S.C. 1832 et seq.)
Reflects growing corporate value of intellectual
assets and focus on international IP enforcement
New DOJ Intellectual Property Task Force
31

32. Prohibited Conduct
• Under 18 U.S.C. § 1832 et seq., it is a crime to
1. CONVERT A TRADE SECRET relating to a
product produced for or placed in interstate
or foreign commerce
2. with CRIMINAL INTENT
3. for the ECONOMIC BENEFIT of someone
other than the owner of the trade secret
4. or to ATTEMPT OR CONSPIRE to do so
• Government must prove each element beyond a
reasonable doubt
• The statute of limitations32is five years

33. Penalties
• Fines
• $250,000 - individual
• $5,000,000 - corporation
• $15,000,000 – if for the benefit of foreign
government
• Imprisonment in federal custody
• Maximum 10 years
• Maximum 15 years – if for the benefit of
foreign government
• Forfeiture of any property used in or proceeds
derived from the theft
33

34. ECONOMIC ESPIONAGE ACT AND TRADE
SECRETS
 FOREIGN INVESTMENTS IN THE UNITED STATES
34

35. Committee on Foreign Investment in the
United States (“CFIUS”)
• Initially Formed in 1975 by Executive Order 11858 (May 7, 1975)
• Motivated by increasing concerns about OPEC investments in
U.S. Companies
• Reviewed investments in the US that might have major
implications for U.S. ―National Interests‖
• 1993 Byrd Amendment required CFIUS to investigate all transactions
where acquirer is controlled by or acting on behalf of a foreign
government
• Foreign Investment and National Security Act of 2007 (―FINSA‖)
• Motivated by political and popular uproar over two proposed
transactions:
• 2005 China National Offshore Oil Corporation’s (―CNOOC‖)
proposed purchase of Unocal, and
• 2006 Dubai Ports’ proposed acquisition of Peninsular & Oriental
Steam Navigation Company.
35

36. Committee on Foreign Investment in the
United States
• Policy Goals: National Security v. Foreign
Investment
• To ensure national security while promoting
foreign investment. Executive Order 13456
(January 23, 2008)
• CFIUS reviews transactions by or with any foreign
person, if the transaction could result in control of
U.S. business by a foreign person
• But only where national security is implicated
36

37. Committee on Foreign Investment in the
United States
• CFIUS reviews are limited to national security
considerations (Guidance concerning the National
Security Review Conducted by [CFIUS], 73 Fed. Reg.
74,567 (December 8, 2008))
• For Example:
• Export Issues
– International Traffic in Arms Regulations (―ITAR‖)
– Export Administration Regulations (―EAR‖)
• Classified Issues:
– National Industrial Security Program Operations
Manual (―NISPOM‖)
37

38. CFIUS Covered Transactions
• Merger
• Acquisition
• Credit agreement
• Lease
• Any transaction that results or could result in foreign ―control‖
of any U.S. business, part of a U.S. business, or U.S. assets
by a foreign person, including, but not limited to:
• Investment
• Joint Venture
• Asset Purchase
• Includes transactions when foreign persons convey U.S.
business or assets to another foreign person. (§ 721(a)(3);
31 C.F.R. § 800.207, 800.301)
38

39. CFIUS Covered Transactions
• NOT ―Covered Transactions‖
• Stock splits (if it does not result in a change in control)
• Pro rata stock dividend (if it does not result in achange of control)
• Transactions resulting in foreign person holding 10% or less of a
U.S. owned business and if only for investment purposes
– Objective test
– Narrowly construed
– Look at any rights to directorship, voting rights agreements
and comparable factors
• Acquisition of part of an entity (or asset) that does not constitute a
U.S. business
• Acquisition of securities by a securities underwriter in the
―ordinary course‖ of business
• Acquisition pursuant to insurance contract if made in the ‖ordinary
course‖ of business
39

40. CFIUS Covered Transactions
Industries of interest to CFIUS include:
• Defense • Information technology
• Smart Grid • Telecommunications
• Munitions manufacturing • Energy
• Aerospace • Natural resources
• Software • Industrial products
• Radar • Structural engineering
40

41. ECONOMIC ESPIONAGE ACT AND TRADE
SECRETS
FOREIGN INVESTMENTS IN THE UNITED STATES
 SECURITIES LITIGATION
 ENFORCEMENT
CIVIL
CRIMINAL
NEW FOCUS – CHINESE COMPANIES
 FOREIGN CORRUPT PRACTICES ACT
41

42. SECURITIES LITIGATION
 ENFORCEMENT
42

43. SEC Enforcement Division:
New Investigative Units
美国证交会执法处：新的调查部门
• Market Abuse (includes insider trading)
市场操纵（包括内部人交易）
• Asset Management (hedge funds)
资产管理（对冲基金）
• FCPA
美国《反海外腐败法》
• Structured and New Products
结构化及新颖产品
• Municipal and Public Pension
市政和社会养老保险
43

44. Expanded SEC Enforcement Powers
美国证交会被赋予更大的执法权力
Dodd-Frank Wall Street Reform and Consumer
Protection Act (2010)
《多德-弗兰克华尔街改革和消费者保护法》（2010年）
• Extraterritorial jurisdiction in SEC enforcement actions
for transactions with either cause or effect in the U.S.
美国证交会被赋予境外执法权以处理那些缘起于美国，
或者会影响到美国境内利益的交易，
• Ability of SEC to broadly share information with
foreign, federal, and state government regulators
without waiving privilege
美国证交会在不放弃特权的情况下，能够与外国、联
邦和州政府监管部门广泛分享信息
44

45. Increased Scrutiny of U.S.-Listed Chinese Companies
对中国在美上市公司日趋严厉的监管
• February 22, 2012 SEC press release: ―SEC Charges
China-Based Executives With Securities Fraud‖
2012年2月22日，美国证交会新闻稿称：―美国证交会指控
中国（在美）公司高管人员犯有证券欺诈行为‖
• ―the SEC has revoked the securities registration of at
least a dozen U.S. issuers based in the People’s
Republic of China and instituted administrative
proceedings to determine whether to suspend or
revoke the registrations of 27 more issuers‖
“美国证交会撤销了至少十几家总部位于中华人民共和
国在美上市公司的证券登记，并启动了行政程序，以
确定是否需要中止或撤销另外27家上市公司的登记”
45

46. SECURITIES LITIGATION
ENFORCEMENT
CIVIL
46

47. Sources of SEC Investigations
美国证交会调查的来源
• Market surveillance—use of technology to analyze trading activity
市场监管 — 运用技术手段分析交易行为
• Other SEC divisions
美国证交会的其他部门
• Other government agencies
其他政府机构
• Self-Regulatory Organizations (e.g., FINRA)
自律组织（例如美国金融业监管会）
• Self-reporting by companies
公司自行报告
• Complaints from the public
公众投诉
• Whistleblowers
举报人
• Office of Market Intelligence: coordinates complaints, tips, and referrals
市场情报部：协调投诉、消息和举报等来源的信息
47

48. SECURITIES LITIGATION
ENFORCEMENT
CIVIL
CRIMINAL
48

49. SEC Investigations
美国证交会调查
• Preliminary Investigation (―informal inquiry,‖ ―information request‖)
初步调查（―非正式询问‖、―信息请求‖）
• Voluntary cooperation
自愿配合
• Formal Investigation
正式调查
• Subpoena power; compulsory process
传讯权；强制性程序
• Non-public (confidential)
非公开（保密）
• Fact-finding
事实调查
• Wells Notice process: when the SEC determines that it may bring a civil
enforcement action
韦尔斯通知程序：在美国证交会认为该程序可能导致民事执法行动时采取
49

50. Wider Range of Potential Penalties From U.S.
Government Enforcement Actions
美国政府执法行动可能导致的种种处罚
(Partial List)
（不完全清单）
• Trading Suspension • Cease and Desist Order
交易中止 制止令
• Revoke Securities • Officer and Director Bar
Registration 禁止相关人士担任高管和董事
撤销证券登记 • Independent Monitor
• Asset Freeze 指派独立监管人
资产冻结 • Criminal Penalties (including
• Disgorgement imprisonment)
退出不当所得 刑事处罚（包括被判入狱）
• Monetary Penalty (Fine)
金钱处罚（罚款）
50

51. SECURITIES LITIGATION
ENFORCEMENT
CIVIL
CRIMINAL
NEW FOCUS – CHINESE COMPANIES
51

52. Increased Scrutiny of U.S.-Listed Chinese Companies
对中国在美上市公司日趋严厉的监管
52

53. Increased Scrutiny of U.S.-Listed Chinese Companies
对中国在美上市公司日趋严厉的监管
53

54. Increased Scrutiny of U.S.-Listed Chinese Companies
对中国在美上市公司日趋严厉的监管
54

55. Increased Scrutiny of U.S.-Listed Chinese Companies
对中国在美上市公司日趋严厉的监管
55

56. SECURITIES LITIGATION
ENFORCEMENT
CIVIL
CRIMINAL
NEW FOCUS – CHINESE COMPANIES
 FOREIGN CORRUPT PRACTICES ACT
56

57. What is the FCPA?
Anti-bribery provision: Prohibits corrupt payments to foreign government
officials for the purpose of obtaining or retaining business
反贿赂：将出于影响官方决定以获得商业利益之目的而向世界仸何地方的外国官
员行赂的行为认定为犯罪
Accounting provision: Requires companies with publicly traded stock in
the US (registered with the SEC) to meet certain record keeping and internal
control standards
会计：要求在美国公开发行股票（在美国证券交易委员会注册）的公司符合特定
记录保存和内控标准
• The FCPA applies to US companies and their overseas employees and agents
• It is extremely broad and harsh; in recent years it has become a major concern
for US companies operating overseas, especially in China
美国反海外腐败法是一项适用于美国境外公司及雇员的美国法律
美国反海外腐败法禁止贿赂外国政府官员的行为
美国反海外腐败法涉及的面极广且十分严格，在最近五至七年中成为在海外经营–尤其在中国经
营的美国（及其它）公司的重大法律问题
57

58. Severe Punishments for Violations / 原因：对违法行为处罚严厉
• Company Liability: Substantial Fines / 公司责仸：巨额罚款
• Individual Liability: Fines and Imprisonment / 个人责仸：罚款和入狱
• US$250,000 and/or 5 years imprisonment, per violation
每项违法行为罚款25万美元，入狱5年或两者并罚
• Interruption and Disruption of Business due to internal and government investigations
内部调查及政府调查影响公司的正常运营
• Damage to Reputation 有损公司声誉
• Effect on Stock Price 影响公司股票价格
• Costs of Legal Defense 增加法律合规的成本
• Siemens paid US$500 million to attorneys and forensic accountants
西门子为此支付5亿美元律师和法务会计费用
• Adverse employment consequences imposed by Companies themselves on
employees directly involved or who knowingly fail to stop abuses
TTM自身对直接涉案或未能阻止违规行为的雇员迚行处罚
58

59. Notable FCPA Penalties
• ABB reserved $850 million for a • Siemens paid $1.6 billion in fines to
resolution of U.S. and European U.S. and German enforcement
corruption charges in the first authorities in December 2008.
quarter of 2010. • AB Volvo paid $19.6 million for
• General Electric paid $23.4 million, violations discovered during the
including $18 million of disgorged U.N. Oil for Food Programme
profits, in July 2010. investigation in March 2008.
• Daimler AG paid $91 million in • Chevron paid $30 million in
disgorged profits in March 2010. disgorgement and penalties for
U.N. Oil for Food Programme
• BAE pleaded guilty to making false violations in November 2007.
statements about its FCPA
compliance program and paid a • Baker Hughes paid more than $44
$400 million criminal fine in million in April 2007.
February 2010.
• Halliburton and its subsidiary,
Kellogg Brown & Root, paid $579
million in penalties for violations of
the FCPA in February 2009.
59

60. Some FCPA Principles
• In addition to bribes, the law also prohibits corruptly offering any benefit or thing of ―value‖
directly or indirectly to a government official
• Employees of state-owned enterprises and relatives of government officials may be
―government officials‖ under the FCPA
• There is no de minimis exception
• It is unlikely that the payments can be justified as ―facilitating‖ payments
• No bribery is permitted under PRC law, which is more strict than US law
• It is useless to argue that PRC anti-bribery laws are not consistently enforced, or ―it is
necessary to do business‖ or ―everyone does it‖
• If you know of the violation but were not involved, you may still be liable
• If you did not know of the violation but should have known or ignored warning signs, you
may still be liable
• 美国反海外腐败法不但禁止向政府官员行贿，而且禁止向其提供的仸何利益或具有价值的物
品
• 该法案不存在“小额礼品”的抗辩
• 政府官员包括国有企业的雇员
• 不存在真正的例外或抗辩理由
• 很难证明大多数付款出于“便利”或“促迚”之目的
• 中国本地法律禁止贿赂–其实中国法律比美国法律更严格
• 中国反贿赂法内部不一致或未被严格执行的事实并不重要
• “大家都这么做”的事实并不重要 60

61. FCPA Books And Records Principles
• Payments not properly recorded in the Company’s books and records may be a
FCPA record-keeping violation even where there is insufficient proof of bribery
如果您应当知情或对警告–―警示标示”置之不理，即便不知情也不能免除您的法律责
仸
帐外交易和现金交易本身就很可疑
即使执法机构不能证明贿赂，他们通常能证明付款未在公司会计帐簿和记录中妥善记
载，而该行为也构成违法
• Accounting violations are easier for the government to prove so beware of
• Cash transactions
• Off-books accounts and ledgers
• Fake receipts
• False or unsubstantiated expenses or cash advances
• 切记，政府更易证明会计（“帐簿及记录”）及内部控制方面的违法行为
• 现金交易
• 帐外帐目及分类帐
• 假收据
• 虚假或无证明的费用或预支现金 61

62. More FCPA Books And Records
Principles
• Companies can acquire FCPA problems in M&A transactions
 Careful due diligence is essential in any acquisition
 Important to carefully structure and document M&A transactions
• 您还可能在并购交易中涉及美国反海外腐败法的问题
 有必要在仸何收购活动中迚行细致的尽职调查
 在交易架构及文件记录中采取保护措施可能有所裨益，但其保护程度有限
When in doubt, consult immediately with Company
counsel
62

63. ECONOMIC ESPIONAGE ACT AND TRADE
SECRETS
FOREIGN INVESTMENTS IN THE UNITED STATES
SECURITIES LITIGATION
ENFORCEMENT
CIVIL
CRIMINAL
NEW FOCUS – CHINESE COMPANIES
FOREIGN CORRUPT PRACTICES ACT
 NATIONAL SECURITY 63

64. 64

65. 65

66. CHINESE STATE SECRET LAWS
• Secrets belonging to Chinese Government and state-owned enterprises
("SOEs"): the Law of the People's Republic of China on Guarding State Secrets
includes provisions restricting the export of electronic data and the use of
computers and internet.
• The state secrets law is as vague as it is broad:
• It provides that state secrets are ―matters that have a vital bearing on state
security and national interests and, as determined according to statutory
procedures, are known by people within a certain scope for a given period of
time.‖
• It also includes a broad, catch-all category covering "other secret matters of
the state which shall be kept confidential as determined by state departments
for the maintenance of secrets.‖
• Chinese enforcement authorities have almost unlimited discretion to define
what information may constitute a state secret:
• An American geologist, Xue Feng, was prosecuted for purchasing data
regarding Chinese oil wells under a commercial contract
• At a time when such information had not yet been classified as secret.
• Many clients in China have dealings with the government or
with SOEs.
66

67. Preventive Maintenance
67

68. Preventive Maintenance
CRIMINAL CIVIL
• At best, white-collar • At best, regulatory or civil
criminal prosecution litigation will be extremely
destroys reputation costly to the company
• At worst, it is corporation’s • At worst, regulatory or civil
death sentence, with prison litigation can destroy a
terms for responsible company.
corporate criminals
68

69. Suggested Measures to Prevent
Corporate Liability
• Invest in compliance and prevention training and
procedures programs
• Obtain insurance coverage
• Establish document retention policy
• Study statutes and regulations governing your
industry
• Seek advice early on how to apply them on a
day-to-day basis
69

70. Suggested Measures to Prevent
Corporate Liability
• Well drafted business agreement
• Work closely with U.S. counsel to stay compliant of
existing laws/regulations and keep abreast of
proposed legislation and new development
• Effective IP management
• Chinese companies are beginning to understand
and appreciate the importance of IP protection
• Can be used as an offensive weapon or leverage
in settlement discussions
• Importance of insurance coverage
70

71. Litigation Approach
• Fact: 95% of cases settle before trial (IP
cases, very few go to trial)
• This forces litigants to ask:
• What is my goal in the litigation?
• How do I position the case for optimal
settlement?
• Which mediation/ADR mechanism
best achieves my goal?
• How can I shape the process to be as
cost effective as possible
71