The IP Theft Nexus in the Houston Consulate Closing

Among the purported reasons for closing the Houston Consulate of the PRC were violations of the Vienna Convention regarding consular affairs and  IP theft. According to various press reports, the spokesperson for the State Department, Morgan Ortagus, stated that “We have directed the closure of PRC Consulate General Houston in order to protect American intellectual property and American’s [sic] private information.” This blog looks at the possibility that the consulate was involved in state-sponsored economic espionage.

This Administration (like Obama’s) has been very frustrated by the degree of state involvement in economic espionage matters coming from China and the lack of any effective traditional tools. For example, neither Obama nor Trump (nor any predecessors) took a WTO case pursuant to Article 39 of the TRIPS Agreement which obligates states to protect trade secrets, perhaps because the WTO is perceived as too weak, or that “everyone does it.”  Still, if the extent of state-sponsored trade secret misappropriation was as great as the Administration alleges, a WTO case may have helped gather multilateral support and air US concerns multilaterally.  In other displays of frustration, both Trump and Obama have pursued with some fanfare cases against state actors in absentia.  This has  led to good media coverage against actors such as the People’s Liberation Army, and pyrrhic ex parte convictions.

The Administration also faces another dilemma: criminal economic espionage cases have proven quite difficult since there needs to be a demonstrated state nexus. DOJ has increasingly appeared to be filing or plea bargaining to settle on  “easier” cases – such as traditional trade secret cases which do not require a state nexus or has filed cases involving government grant conflict of interests, fraud, money laundering, etc.   The Administration has also sought to address this through other means such as the Section 301 investigation and tariffs, trade negotiations, strengthening US export controls and CFIUS regulation, and even placing companies on the Commerce entity list where there have been allegations of overseas trade secret theft benefiting China (Fujian Jinhua/theft of Micron technology).

If an economic espionage matter were really the motivation for this sudden evacuation of the consulate and not election-year politics, a good place to look would be for a contemporaneous motivating event.  The closing of the consulate announcement may be timed with an indictment in Washington State 22 hours earlier – which did have one Texas victim nexus and does allege a comprehensive international state-supported economic espionage and personal data theft scheme, including vaccine-related espionage. Two Chinese hackers who are alleged to have had support from the Ministry of State Security in Guangdong were indicted. The hackers were indicted in absentia, once again leaving the US with very limited recourse except pyrrhic ex part convictions. However, no one individual in the Houston Consulate is mentioned – and I imagine that in the usual course of things if a consular official were identified he would have been “PNG’d”, that is, made persona non grata and asked to leave.

Another, more intriguing alternative is that it could also be related to two cases recently discussed by FBI Director Wray, which do have a clear Texas consulate nexus. As Wray mentioned in his July 7 speech before the Hudson Institute:

“Hongjin Tan, for example, [is] a Chinese national and American lawful permanent resident. He applied to China’s Thousand Talents Program and stole more than $1 billion—that’s with a “b”—worth of trade secrets from his former employer, an Oklahoma-based petroleum company, and got caught. A few months ago, he was convicted and sent to prison.

“Or there’s the case of Shan Shi, a Texas-based scientist, also sentenced to prison earlier this year. Shi stole trade secrets regarding syntactic foam, an important naval technology used in submarines. Shi, too, had applied to China’s Thousand Talents Program, and specifically pledged to “digest” and “absorb” the relevant technology in the United States. He did this on behalf of Chinese state-owned enterprises, which ultimately planned to put the American company out of business and take over the market.

“In one of the more galling and egregious aspects of the scheme, the conspirators actually patented in China the very manufacturing process they’d stolen, and then offered their victim American company a joint venture using its own stolen technology. We’re talking about an American company that spent years and millions of dollars developing that technology, and China couldn’t replicate it—so, instead, it paid to have it stolen.”

Notwithstanding these cases theere may be other factors at play, notably:, election-year politics, a general decline in bilateral relations, and national security issues.  The Administration may also have decided on an aggressive escalation at this time to show support for countries like the UK and India as these countries have become more hawkish towards China, such as by not procuring Huawei equipment (the UK), or limiting the use of Chinese social media platforms (India), or opposition to the National Security Law in Hong Kong (UK and many others), and/or by opposing Chinese maneuvers in the South China Sea (UK and many others).

We have limited information to guess at the involvement of the Houston Consulate in any economic espionage activities, nor do we have any sense of the role of various Chinese intelligence agencies in this recent development, or what are the specific kinds of malfeasance that trigged this reaction by the Administration.  According to the New York Times, David Stilwell at the State Department has called the Houston consulate the “epicenter” of research theft.

In terms of Chinese ministry involvement, the US indictment in Washington State points to a key role of the Ministry of State Security in technology misappropriation.   If scientific research is the key focus, China’s  Ministry of Science and Technology is another important agency, which has knowledgeable officials overseas and is engaged in a range of open, legitimate, and highly important collaborative activities.  MoST is probably the diplomatic presence with the greatest depth in any of these accused technologies.  However,  MoST is rarely mentioned as an espionage actor by the Administration and is not even indexed as an espionage actor in recent books by Roger Faligot and Mattis/Brazil on “Chinese Spies” and “Chinese Communist Espionage”, respectively.  According to the Ministry of Science and Technology, there are 75 such MoST offices overseas, including one in Houston.

It is conceivable that some of MoST’s work may not be consistent with US ethics, expectations or laws despite its overall positive role and could have been some part of the decision to retaliate.  As one intriguing example of a role that could lead to conflict, by operation of Chinese law, Chinese science and technology departments in Chinese missions overseas are also in charge of vetting proposed patent prosecutions of Chinese students and patents derived from Chinese technology projects overseas, potentially placing the confidentiality of the patent disclosure at risk.  Moreover, the vague rule requires in certain circumstances that the Chinese inventor (or, presumably, co-inventor) own or apply for the patent if it is not a “service invention” thereby placing these inventors in potential conflict with their host institutions overseas. See the 1986 rule “Concerning Completion of Invention Patents Overseas by Chinese Students Studying Abroad”  关于我国学者在国外完成的发明创造申请专利的规定, promulgated by the Chinese Patent Office, the Ministry of Foreign Affairs and the State Science and Technology Commission (the predecessor of MoST). This 1986 rule outlines a scenario not altogether different from the facts involved in the Shan Shi conviction – applying for a patent in China for an invention made in the United States – notwithstanding the contribution or expectation of others.  Interestingly, Shan Shi was also convicted of trade secret theft by a Houston, Texas federal court.

Another reason to retalitate may have simply been that since US consulates have been thinly staffed and the Wuhan consulate had been closed, there may be an element of consular placement politics which has occurred in the past with regard to China.  The United States has also been complaining about lack of reciprocity with China in access by our diplomats.  The State Department may have also calculated that even if China retaliates this was a lose-lose scenario, where China will lose more than the United States.  A similar calculation may have occurred with respect to these efforts regarding reciprocity or asking Chinese journalists to leave.

Election-year politics may have been an important part of the choice of how to retaliate, even if these political motivations were not the original factor in deciding that retaliation was necessary. Closing a US consulate in retaliation for IP theft should also lead observers to question whether the Phase 1 Trade Agreement, which was intended to address “IP theft” and lead to “structural changes” had achieved its core, motivating goals.  The Houston consulate closing could thus be seen as a crude acknowledgment that the Administration had failed in the primary motivations for its trade war with China.  The prospects for a Phase 2 Agreement are growing darker by the day.

We may never know all the motivations for the Houston closing.  Two things are clear: closing consulates can greatly damage bilateral relations, and we cannot anticipate when this cycle of accusations and reactions will de-escalate.

Update of July 24, 2020:  Matt Peterson in a July 24 article in Barron’s quotes a former USTR official, Clete Willems, who took issue with this blog:

The administration cited intellectual-property theft in its decision to close the consulate in Houston. Mark Cohen, a law professor who worked for the U.S. Patent and Trademark office in Beijing, wrote about that: “Closing a U.S. consulate in retaliation for IP theft should also lead observers to question whether the phase-one agreement, which was intended to address ‘IP theft’ and lead to ‘structural changes’ had achieved its core, motivating goals. The Houston consulate closing could thus be seen as a crude acknowledgment that the administration had failed in the primary motivations for its trade war with China.” What do you make of that?

My quick reply: Indeed, most of the accomplishments on IP in Phase 1 were in domestic Chinese reform and there was nothing as I recall on diplomats. That would have been highly unusual.  However, most of the significant IP reforms in fact occured before the Phase 1 Agreement, in the spring of 2019 or even in 2017 (on pharma).  One could argue there isn’t that much new IP in the Phase 1 Agreement.  As I have explained elsewhere, it “adds much less than its appearance would suggest.”  The focus of the Phase 1 Agreement had already migrated to other issues, such as market access. 

This does not mean that economic espionage or international issues were not at the core of the stated reasons for the trade war and to suggest otherwise is an exercise in historical revisionism.  The predecessor  301 investigation conducted by USTR and the subsequent Phase 1 Agreement explicitly sought to resolve “cyber-enabled theft” and “global espionage” in USTR’s own words.  See predecessor 301 Report Update at pp. 10-21. The incentives to steal trade secrets – whether due to Made in China 2025 or an array of other industrial policies and subsidies  – were not however discussed in the Phase 1 Agreement. Despite the imposition of punitive tariffs, these programs were not dismantled.  The “groundbreaking provisions in an area of critical importance to the United States: protecting intellectual property” that the President trumpeted in announcing the agreement, hardly addressed these core concerns.   There was also no improvement in transparency or other rule of law imperatives, no demends for cooperation between law enforcement authorities on criminal trade secret matters, etc.  that could have affected China’s handling of state-sponsored trade secret theft.  Some important laws were amended, but no sweeping “structural change” to back the state out of the extensive incentives that exist for IP misappropriation was accomplished. 

The Phase 1 Agreement wasalso not an agreement focused purely on domestic Chinese law.  For example, cross-border counterfeiting and Customs measures were part of the package, not simply “counterfeiting in China.” A perverse example of how much international IP theft, including state sponsored esiponage, was of core importance to the agreement and the messages we imparted to China:  Americans are being sued in China for trade secret infringement pursuant to the harsher laws that the US has encouraged China to implement, and Chinese criminal law is being amended to specifically impose harsher penalties when trade secrets are stolen on behalf of foreign parties, based on provisions that mimic our Economic Espionage Act. 

It is unclear to me if the Houston consulate closing was truly about these same issues or if the closing will have any impact on them.  The stated reason for closing was, indeed, trade secret theft and economic espionage.  This does suggest that the US might have felt that it had exhausted other remedies, and is a further indication of a failure to address key motivating reasons for the trade war in the Phase 1 Agreement.   Why else would we have discussed these IP theft issues at such great length, with such economic pain, and with such high expectations?  I agree that hopefully discussions will continue between our countries on trade – considering the volume of trade and investment, it is harder to dismantle those relationships than packing up a consulate.  Discussions should be conducted, however, via a plurality of engagements – not simply USTR – to ensure resiliency.

Further update of July 24, 2020: Here is an interview with me on KHOU on July 24, 2020 on the Houston consulate closing.


 

Some China IP Resources While Sheltering in Place

An unofficial translation of the proposed Copyright Law amendments that have been made available for public comment, is available here.  Thanks to Prof. Jiarui Liu for sharing his translation! All translations are unofficial and are being provided for the convenience of non-Chinese readers, with no representations and warranties whatsoever.

The next event in our series of webinars is with Mara Hvistendahl, author of The Scientist and the Spy: A True Story of China, the FBI, and Industrial Espionage. Although Ms. Hvistendahl has already appeared in several interviews,  this one promises to offer different perspectives on the book.  She will be joined in this webinar by Mark Betten, an FBI agent who is chronicled in the book, Jennifer Johnson, DuPont’s attorney who was also involved in the investigation, as well as Jim Pooley, who teaches trade secrets at Berkeley Law and me.   The webinar will be held on May 13, 2020, at 10:30 AM (PST).   The registration page is here.

A video recording of our successful May 6  webinar, with Amb. Craig Allen, Wendy Cutler and Warren H. Maruyama on The Phase 1 Agreement and its Implementation is also now available here.

All of the above are being provided free of charge.

Is It In There – CNIPA’s “Phase 1” IP Action Plan?

CNIPA released on April 20, 2020, its  2020-2021 Implementation of the “Opinions on Strengthening the Protection of Intellectual Property” Promotion Plan” (2020—2021年贯彻落实《关于强化知识产权保护的意见》推进计划) (the “Promotion Plan”).  Attached are a copy of the Promotion Plan from the CNIPA website and a machine translation, as well as a bilingual translation provided by the USPTO. All translations are provided for readers’ convenience only, are unofficial and do not carry any representations as to accuracy.  Please review them carefully before committing to any course of action based on the translation, and please bring any errors to our attention.  We greatly appreciate USPTO,  China Law Translate, and the numerous trade associations and law firms that have made translations publicly available over the years.

The Promotion Plan specifically references and appears to be a further implementation of the CPC/State Council  Opinion on Strengthening the Protection of Intellectual Property, released in November 2019 (关于强化知识产权保护的意见) (CPC/State Council Opinion), which I blogged about here. In November I described this CPC/State Council Opinion as going “part way” in addressing US concerns about IP theft that were being raised by the Trump Administration. This Promotion Plan issued by CNIPA is more comprehensive and more directly reflects the Phase 1 Trade Agreement between the US and China that the CPC/State Council Opinion, including setting specific timetables and interagency responsibilities. However, it is being promulgated at a considerably lower level of governmental authority than the CPC/SC Opinion. CNIPA is a division within a ministry-level agency (SAMR) and is arguably weaker and less independent today than when SIPO was a separate agency. In this respect, the Promotion Plan is also weaker than previous action plans promulgated under MofCOM’s leadership. MofCOM and its predecessor agencies were ministries. In a sense, it harkens back to action plans from the 1990s.  The IPR Leading Group was chaired in the 1990s often by a Vice Minister, including Wu Yi, who later became Vice Premier. One may wonder: is this “déjà vu all over again”?.

Some caution also needs to be maintained in approaching this document. First and foremost, are all the Phase 1 commitments, in the words of a once famous  commercial for spaghetti sauce – “in there”? Please write to me with your observations.  A second issue involves CNIPA’s authority. Although this document sets out plans for the courts, procuracy, and legislative branches, Chinese state council government agencies do not have the authority to bind these other branches of government.  Nonetheless, these agencies often coordinate their activities together, including through national and local leading groups and coordinating bodies. The puzzle deepens further, however, as the Promotion Plan itself does not indicate the authority by which it has been enacted. Rumor had been that the Promotion Plan was delayed because NPC approval was needed.

To an experienced reader, this Promotion Plan also has the “look” and “feel” of the National IP Strategy Implementation Plan (NIPS Implementation Plan) with its extensive, specific commitments. I  blogged about the NIPS Implementation Plan here.  The NIPS Implementation Plan has a statutory basis in the China Science and Technology Promotion Law (2007). Moreover, the NIPS Implementation Plan similarly has a focus on China becoming a “strong” IP country.

One difference between a NIPS Implementation Plan and an implementation plan from MofCOM in the past is that a NIPS Implementation Plan would have likely needed more local coordinating entities to be implemented nationwide. MofCOM had such authority through its coordination of the former State Council leading groups on IP.  While serving in the Embassy (2004-2008), I visited many of the local IP coordination offices to discuss local IP coordination and enforcement issues. This plan, if it is to be rolled out locally through new mechanisms, will need the support of the CPC and State Council, or local CNIPA offices, or through other local structures.

Several friends have been asking me this morning if this is the Chinese IPR “Action Plan” as required by the Phase 1 Agreement.  The Phase 1 Agreement provided that “Within 30 working days after the date of entry into force of this Agreement, China will promulgate an Action Plan to strengthen intellectual property protection aimed at promoting its high-quality growth. This Action Plan shall include, but not be limited to, measures that China will take to implement its obligations under this Chapter and the date by which each measure will go into effect.”

On the first review,  this Promotion Plan appears to directly reflect the commitments made by China in the Phase 1 Agreement. What the US has called “high-quality growth” might be its misapprehension of China’s recent mantra of building a “strong IP economy.” There are many action items in the Promotion Plan that are focused on strengthening China’s IP resources. Considering the current pandemic, the timing for the release of the Promotion Plan is also about right. Moreover, it makes sense for China to release this document as part of the flurry of announcements surrounding April 26 (World IP Day). CNIPA releasing this document also does not contradict any explicit commitment in the Phase 1 Agreement. The negotiators of the Phase 1 Agreement did not apparently agree to nominate which Chinese agency would issue the Action Plan.

Based on a quick read, this Promotion Plan also appears to share the same weaknesses of the Phase 1 Agreement, with its selective focus, under-emphasis on the courts, lack of clarity around “patent linkage” (including “artificial infringement” determinations by the courts), continuing emphasis on ministry action plans and administrative enforcement, lack of historical context or data to ensure that the Promotion Plan actually delivers results, “old wine in a new bottle” commitments in Customs, criminal thresholds and other areas, and lack of any commitment to increasing administrative and judicial transparency.  The lack of strong commitments to increasing judicial and administrative transparency remains the most troubling of all and makes the agreement difficult for governments and rightsholders to adequately apprehend, including making sure that concrete improvements are not only “in there” but being fully implemented.  If the Phase 1 commitments implemented in the 133 action items of the Promotion Plan are the “Action Plan” it is a further indication that any forthcoming changes in China’s IP regime that arose from the trade war are likely to be significant, but not necessarily the kind of  “structural change” that would dramatically mandate more market reform through less government intervention in China’s IP regime.