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DOJ Makes Good on “China Initiative” Promise with New Indictments

As discussed in a post last month, the DOJ recently pledged to target Chinese companies and individuals who threaten the United States through the theft of intellectual property—part of the “China Initiative” announced in November 2018. Making good on its word in short order, the DOJ announced this past Monday that a grand jury in the Western District of Washington had returned charges in a ten-count indictment against Huawei Device Co., Ltd. (“Huawei China”) and Huawei Device USA, Inc. (“Huawei USA”) for alleged theft of trade secrets conspiracy, attempted theft of trade secrets, wire fraud, and obstruction of justice.

According to the indictment, from 2012 to 2014, Huawei China coordinated with Huawei USA to steal intellectual property from T-Mobile regarding a proprietary robot designed to test phones prior to sale, known as “Tappy.” T-Mobile rejected various licensing offers from competitors to use Tappy, but permitted some vendors to use the device (including Huawei USA) under strict non-disclosure and confidentiality agreements and only within T-Mobile labs.

Despite these protections, Huawei China allegedly made repeated demands of the Huawei USA engineers to violate the confidentiality agreements by providing information about Tappy to Huawei China engineers including, among other things, secretly taking and sharing photos and measurements of parts of the robot, and stealing a piece of the robot. At the time, Huawei China was working to develop its own robot, known as XDeviceRobot. The indictment alleges that a Huawei China engineer came to the United States and accessed the lab without authorization, using a Huawei USA badge. T-Mobile employees caught the engineer in the lab on two occasions and revoked all Huawei access to Tappy.

Huawei USA conducted an internal investigation, resulting in a 23-page “Investigation Report” that was delivered to T-Mobile in an attempt to repair the relationship. The report pins the blame on former, rogue engineers. The indictment, however, alleges that email evidence shows that the report was replete with misrepresentations designed to conceal a widespread scheme to perform reconnaissance on Tappy. The indictment further alleges that Huawei China launched a formal bonus policy for its employees shortly after the report was submitted that links monetary bonuses to valuable, confidential information employees steal from other companies.

Also announced by the DOJ on Monday is a separate 13-count indictment in the Eastern District of New York charging Huawei entities and its CFO Meng Wanzhou with various offenses related to a relationship between Huawei and a company called Skycom, which has ties to Iran. The indictment alleges that Huawei conducted millions of dollars in transactions through Skycom over the last decade that were in violation of the U.S. Iranian Transactions and Sanctions Regulations, and fraudulently concealed those transactions and the relationship from institutional investors and bank partners. V&E reported on the highly controversial arrest of Ms. Meng last month in Canada. The U.S. government is currently seeking Meng’s extradition to the United States.

In the week prior to the announcement of the indictments, China’s Vice President Wang Qishan offered a response to U.S. policies like the “China Initiative” and “America First” during the World Economic Forum in Davos, Switzerland. Though the United States was not mentioned by name, Wang stated that China “rejects the practices of the strong bullying the weak and self-claimed supremacy,” and touted the benefits of globalization over the “unilateralism, protectionism, and populism” many countries were embracing in policy decisions. Wang also offered a Chinese parable of the “devil and the demon,” the lesson of which is that no matter how great the enforcement, at least a few thieves will inevitably stay one step ahead of authorities. With these two indictments, the DOJ does not appear to be fazed by Wang’s suggestion of policing futility. Appearing by videoconference due to the government shutdown, U.S. Secretary of State Mike Pompeo addressed the U.S.’s relationship with China at the Davos forum, reiterating the need for U.S. businesses to feel they can “operate in China without risk that their trade secrets and their intellectual property will be stolen.” We can anticipate some developments during U.S.-China trade talks planned this week, but it seems clear that the DOJ is serious about making activities by Chinese companies a priority.

Visit our website to learn more about V&E’s FCPA & Global Anti-Corruption practice. For more information, please contact Vinson & Elkins lawyers Jessica Heim or Christopher James.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.