The Huawei Indictments are the New Normal

1. The Huawei Indictments

On January 28, the U.S. Department of Justice unsealed two indictments against Huawei. The first indictment concerns ongoing claims against Huawei and its CFO, Meng Wanzhou, for allegedly violating U.S. sanctions against Iran.

The second and more interesting indictment concerns alleged trade secret thefts by Huawei’s U.S. subsidiary under the direction of Huawei China.

If you want a primer on “how China engages in IP theft” the trade secrets indictment is a great place to start. If Chinese companies do in the United States what is described in this indictment (and they do), imagine what Chinese companies do in China.

2. How Chinese Companies Steal IP

Let’s say you have set up a WFOE in China to manufacture a critical chemical. The composition of the chemical and its manufacturing method are trade secrets. You have resisted the demands of your Chinese customers to set up a joint venture in China. You have resisted the demands of your Chinese customers to license your technology to a Chinese entity. The only Chinese people with access to your technology are your Chinese employees. Since those employees are insiders, your technology is safe, right? Unfortunately, the answer is no.

What can happen to the Chinese employees of your WFOE in China is exactly what allegedly happened to the Chinese employees of Huawei’s U.S. subsidiary. The local Chinese government will give your employees a detailed list of what they must take from the WFOE and the timeframe in which they must complete the task. Though your Chinese employees may formally work for your WFOE, the Chinese government is their ultimate “boss,” in the same way Huawei China is alleged to have been the ultimate boss of the employees of their U.S. subsidiary.

What if your WFOE employee is an honest person and resists following the local Chinese government’s instructions? Or perhaps the employee is not so honest, but resists because they do not want to risk losing their job if caught. The local government tells your employee: “Your spouse works as a nurse in the local hospital and it would be too bad if she lost her job. Your father lives on a government pension and it would be too bad if he lost that. Your daughter is applying for admission to the local high school and it would be too bad if she is denied entry. On the other hand, if you provide what we have requested, we will ensure none of this happens. Moreover, you and your family will receive benefits. If you lose your job, we will find you another job. Don’t worry about it. Just do what you are told and help YOUR country.”

The pressure to comply is overwhelming and your Chinese employee complies. Your employee really has no choice.

This is the practice in China and most in IP sensitive industries understand this and so they do not try to control their employees on IP because they know the CCP is their real boss. They instead set up a costly system in which none of their Chinese employees get  access to the WFOE’s sensitive information. This makes operations difficult and oftentimes the system’s rules are violated and access to IP is granted. When that happens, the technology gets taken because the pressure from the government never stops, in the same way the pressure from Huawei China is alleged to have never stopped against Huawei’s US-based Chinese employees. This is what is often meant by “forced technology transfer.”

3. The Huawei Takeaways for Your Business

These indictments are focused on how Huawei conducts business. The U.S. Department of Justice (DOJ) is claiming Huawei intentionally and as a matter of company policy violated U.S. law. For example, in the trade secrets indictment, the DOJ claims Huawei China directed its U.S. employees to steal trade secrets from T-Mobile and when the U.S. employees did not succeed at this, Huawei China dispatched a Chinese based engineer to complete the job. The indictment also alleges that when Huawei got caught taking T-Mobile’s IP, Huawei submitted an internal report lying about what happened. Huawei’s technology theft is alleged to have been part of a Huawei China program that paid its employees bonuses for stealing intellectual property.

4. The DOJ’s Claims Against Huawei, and Against China as Well

The DOJ claims Huawei stole T-Mobile trade secrets, and by doing so it overturned the underpinnings of the U.S. legal system and the world legal order. The DOJ’s press release on the trade secrets case makes this clear:

“The charges unsealed today allege that Huawei intentionally conspired to steal the intellectual property of an American company in an attempt to undermine the free and fair global marketplace,” said FBI Director Wray. “To the detriment of American ingenuity, Huawei continually disregarded the laws of the United States in the hopes of gaining an unfair economic advantage. As the volume of these charges prove, the FBI will not tolerate corrupt businesses that violate the laws that allow American companies and the United States to thrive.”

The U.S. charges are directed at the impact Huawei’s actions have had on both the United States and the rest of the world. The U.S. seeks to expand its claims against Huawei to go beyond the device security concern to a more general concern with how Huawei (and other Chinese businesses and China itself) violates the laws and regulations underpinning the modern free trade system. The indictments against Huawei read as a global campaign against how Huawei and China do business.

We should therefore expect additional DOJ enforcement actions against Chinese companies. Worldwide arrests and extradition proceedings and civil and criminal litigation against Chinese companies and their executives will become more common and not just in the United States.

Most U.S. companies have been reluctant to take aggressive action against China IP theft for fear that doing so would impact their business in China. They feared a “tit for tat” response by the Chinese government. With the deterioration of US-China relations, this concern seems to be melting away and we expect decades of pent-up resentment against China’s IP practices to become a cascade of claims from the United States and others.

Welcome to the New Normal.

UPDATE: It took less than 24 hours to prove out the above. See FBI charges second Apple employee with stealing autonomous car secrets.