In an unprecedented move, federal prosecutors have indicted Pangang Group Company Limited, a company owned and controlled by the Chinese government, as well as and one of its Chinese executives, in a high profile criminal trade secret case in San Francisco.  In essence, the U.S. Attorney for the Northern District of California has decided to indict China for the theft of DuPont’s trade secrets for the process and manufacture of titanium dioxide (TiO2), a commercially valuable white pigment that is used in a large number of materials ranging from paints to plastics to paper and is particularly valuable in military and aerospace applications. 

The indictment quickly follows the U.S. government’s successful opposition to the release of Walter Liew, a California businessman whom the government has also indicted for, among other things, conspiracy to steal trade secrets, attempted economic espionage and witness tampering.  I have attached a copy of the 77-page amended indictment below, as well as the original indictment against Liew and his wife, Christina Liew.
If there is any doubt that this is a cannon shot across the bow, one need only read the opening sentence of the amended indictment: “The People’s Republic of China publicly identified the development of chloride-route titanium dioxide (TiO2) production as a scientific and economic priority.”  The indictment goes on to describe Pangang Group as a state-owned enterprise controlled by government agencies of China and run by officials of the Communist Party of China.
The case unfolded shortly after DuPont sued Liew in Northern California last April and notified federal authorities of its concerns.  On August, 23, 2011, federal prosecutors indicted Liew and his wife, accusing them of providing false statements to federal authorities and obstructing justice in connection with their investigation of the possible theft of DuPont’s titanium dioxide.  During the course of the search of the Liews’ home, the FBI found a “trove” of letters and correspondence establishing that Liew was in the process of securing DuPont’s TiO2 processes and data to sell to Chinese companies.  It is this trove that led to the amended indictment against the Liews, Pangang Group, its subsidiaries, and its Vice President of the Chloride Process TiO2 P roject Department, Hou Shengdong.
According to one of the prosecutor’s filings, Liew “was tasked by representatives of the [Chinese] government to obtain technology” for building titanium factories, and “obtained that technology from former DuPont employees and sold it to companies controlled by the [Chinese] government.”  Liew is alleged to have paid former DuPont engineers for assistance in designing the TiO2 processes at issue, and in turn secured contracts with Pangang Group and others for $5.6 million, $6.2 million and $17.8 million.
In addition to naming a state-owned manufacturer, there are a number of other interesting twists to this case.  For example, according to the Wall Street Journal and Reuters, one of the key witnesses killed himself last week. That witness, Tim Spitler, was a former DuPont engineer who had testified that he discussed secret DuPont documents with Liew.  In addition, according to the Wall Street Journal, two executives of Pangang were detained and prevented from leaving the U.S. so that the government could obtain testimony about the Liews.  However, they were released to return to China after securing their testimony, a curious decision given the undeniable thrust of the indictment directed toward Pangang Group and the Chinese government.
As I noted yesterday in briefly describing media reports of the indictment, I can’t recall a criminal case that so directly asserted that the Chinese government had a role in the trade secret allegations at issue, let alone one that actually indicted a state-owned company.  Most, if not all, of the recent prosecutions have been against individuals.  The timing of this decision is of equal significance.  Vice President Xi Jinping, who is widely expected to be promoted to the Chinese Communist Party chief later this year, is visiting the U.S. next week to discuss a host of diplomatic, economic and policy differences with President Obama and others. 

The Obama administration has not been shy about expressing its concerns about China’s role in economic espionage: Last October’s report by the Office of the National Counterintelligence Executive found that China was the largest source of attacks on U.S. businesses, and accused Chinese intelligence of being a “persistent collector” of data stolen from U.S. companies.  It also follows the conviction of Hanjuan Jin, a Chinese-born American, on Wednesday, February 8, 2012, for the theft of trade secrets from Motorola (the court, after a bench trial, rejected the government’s Economic Espionage Act charges).
So what does all of this mean? At minimum, it signals an escalation in the increasingly bitter charges and counter-charges that the U.S. and China have lobbed against one another over the past decade. It will be interesting to see what the next step is in the criminal proceeding, as well as in the broader dialogue between the two governments.

United States of America v- Walter Lian-Heen Liew- et al-0-002.pdf (3.07 mb)

United States of America v- Walter Lian-Heen Liew- et al-0-001.pdf (346.27 kb)