IP Law Daily Chinese companies not entitled to sovereign immunity from criminal trade secret theft
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Tuesday, July 27, 2021

Chinese companies not entitled to sovereign immunity from criminal trade secret theft

By Brian Craig, J.D.

The Chinese companies were not "instrumentalities" of the People’s Republic of China (PRC) immune from stealing DuPont’s trade secrets.

In a criminal case against four affiliated Chinese companies alleging violations of the Economic Espionage Act for stealing DuPont trade secrets related to technology for producing titanium dioxide (TiO2), the U.S. Court of Appeals for the Ninth Circuit in San Francisco has affirmed a denial to dismiss the indictment based on claims that the companies are entitled to immunity under the Foreign Sovereign Immunities Act ("FSIA"). In affirming the district court’s denial of the motion to dismiss the indictment, the appeals court concluded that the Chinese companies failed to carry their burden to show that they are instrumentalities of the People’s Republic of China (PRC) within the meaning of the FSIA. The panel found that that the allegations in the indictment fail to show that the PRC owned a majority of the corporation’s shares at the time of the indictment (United States v. Pangang Group Co., Ltd., July 26, 2021, Collins, D.).

In 2012, the government indicted four affiliated Chinese companies for violating the criminal provisions of the Economic Espionage Act ("EEA"). The companies are Pangang Group Company, Ltd. ("PGC"); Pangang Group Steel Vanadium & Titanium Company, Ltd. ("PGSVTC"); Pangang Group Titanium Industry Company, Ltd. ("PGTIC"); and Pangang Group International Economic & Trading Company ("PGIETC") (collectively, "the Pangang Companies"). The indictment alleges that the Pangang Companies conspired with Walter Liew—a U.S. citizen of Chinese origin—and others to steal DuPont trade secrets relating to certain chloride-route technology for producing TiO2, a white pigment derived from ore and used in a wide variety of products. Since the 1940s, DuPont had been a leader in developing the chloride process, which was less labor intensive and costly than a sulfate process used in Europe and Asia. DuPont’s earlier plants were designed to use a variety of ore qualities, but a particular plant was developed for high-grade ores (ores containing high levels of titanium). In 2013, the federal district court in San Francisco denied a motion to the indictment against Liew and another company, USA Performance Technology, Inc. (USAPTI). In 2017, the Ninth Circuit affirmed the convictions of USAPTI and Liew. Liew was sentenced to 144 months in prison. The Pangang Companies pleaded not guilty in 2018, and then moved to dismiss the indictment on the basis that the companies are entitled to immunity under the FSIA. The district court denied the motion to dismiss. The companies appealed to the Ninth Circuit.

Appellate jurisdiction. The Ninth Circuit first rejected the government’s argument that the appellate court lacked jurisdiction to consider the appeal. The Ninth Circuit has long held that an order denying immunity under the FSIA is appealable under the collateral order doctrine. The U.S. Supreme Court has also held that the asserted right of a foreign sovereign to be free from suit is so important that a court normally should reach a decision about immunity as near to the outset of the case as is reasonably possible.

Immunity. The Ninth Circuit then held that the Pangang Companies failed to establish that they qualify as "foreign states" under the FSIA to receive immunity. The immunity afforded by the FSIA applies only to a "foreign state," a phrase that includes a "political subdivision of a foreign state or an agency or instrumentality of a foreign state." In Dole Food Co. v. Patrickson, 538 U.S. 468 (2003), the U.S. Supreme Court held that a corporation is an instrumentality of a foreign state under the FSIA only if the foreign state itself owns a majority of the corporation’s shares. The Ninth Circuit also concluded that assuming that the FSIA applies in the criminal context, a defendant’s status as an "agency or instrumentality of a foreign state must be determined as of the time it was first indicted.

Here, the allegations in the indictment affirmatively negate the premise that PGSVTC, PGTIC, or PGIETC may be considered agencies or instrumentalities of the PRC. The indictment describes all three of these entities as being "subsidiaries" of the fourth defendant—PGC. Because the corporate-law concept of a subsidiary refers to a company in which the parent has a controlling share, the indictment indicates that PGC is a parent corporation between the other three companies and SASAC. Because PGSVTC, PGTIC, and PGIETC thus were subsidiaries of another corporation, they were not directly owned by the PRC or SASAC, and they therefore cannot be deemed to be agencies or instrumentalities of a foreign state" within the meaning of the FSIA. As to PGC, the indictment alleges that, at all times relevant, PGC was a state-owned enterprise controlled by the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC), a "special government agency" of the PRC. The panel explained that the allegations of the indictment, standing alone, are insufficient to establish that the companies were instrumentalities of the PRC on the date they were indicted. Because the companies relied solely upon the indictment’s allegations and presented no evidence to support their motions to dismiss, they necessarily failed to establish a prima facie case that they are foreign states entitled to immunity under the FSIA.

Therefore, the Ninth Circuit affirmed the denial of the motion to dismiss the indictment.

The case is No. 19-10306.

Attorneys: Matthew M. Yelovich, U.S. Attorney’S Office, for the U.S. John M. Potter (Quinn Emanuel Urquhart & Sullivan LLP) for Pangang Group Co., Ltd., Pangang Group Steel Vanadium & Titanium Co., Ltd. and Pangang Group Titanium Industry Co., Ltd.

Companies: Pangang Group Company, Ltd.; Pangang Group Steel Vanadium & Titanium Company, Ltd.; Pangang Group Titanium Industry Company, Ltd.; Pangang Group International Economic & Trading Company; E.I. du Pont de Nemours & Company

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