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Ninth Circuit:
No Immunity for Chinese Entity in Corporate Espionage Case
Opinion Says State-Owned Companies May Not Avoid Prosecution Because Stealing Trade Secrets at Issue Is Not Fundamental Government Function Even if Involved Spying to Achieve Stated Goal of Acquiring Technology
By Kimber Cooley, associate editor
Companies purportedly owned and controlled by China do not enjoy sovereign immunity against criminal prosecution for allegedly stealing trade secrets from U.S. chemical giant DuPont relating to the production of titanium dioxide—a white pigment used in the production of a wide range of materials such as paper and paint—where the entities do not perform typical state functions, the Ninth U.S. Circuit Court of Appeals held yesterday.
In an opinion authored by Circuit Judge Daniel P. Collins, and joined in by Circuit Judges Kim McLane Wardlaw and Daniel A. Bress, the court said that the analysis is unchanged by the offense being labeled as “espionage” and public statements by the Chinese government that the acquisition of the technology needed to make the compound is a strategic priority for the country.
Seeking the application of immunity protections were Pangang Group Company Ltd. (“PGC”) and related entities Pangang Group Steel Vanadium & Titanium Company Ltd., Pangang Group Titanium Industry Company Ltd., and Pangang Group International Economic & Trading Company (referred to in the opinion, collectively, as “the Pangang Companies”), each of which was charged in a federal indictment with one count of economic espionage under 18 U.S.C. §1831(a)(5).
In the 1990s, the Chinese government admitted that there was a wide demand for titanium dioxide in the country, but domestic entities had not been able to develop “clean, efficient…production technology.”
Western companies, including DuPont—formally known as E.I. du Pont de Nemours & Company—had a lock on such technologies and were unwilling to share their production secrets. According to the prosecution, the Pangang Companies conspired with individuals, including at least one former DuPont employee, to steal the trade secrets from the U.S. entity and export them to China.
The operative indictment asserts that PGC is a “state-owned enterprise” controlled by the State-Owned Assets Supervision and Administration Commission of the State Council (“SASAC”) which is alleged to be “under the direct control” of the Chinese government. The chair and certain senior managers of PGC are purportedly Chinese Communist Party officials.
Organ of State
On July 9, 2019, the Pangang Companies moved to dismiss the indictment for lack of jurisdiction under Foreign Sovereign Immunities Act (“FSIA”), which defines a covered entity to include one “which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof.”
Senior District Court Judge Jeffrey S. White of the Northern District of California denied the motion, expressing skepticism that FSIA applies to criminal prosecutions but finding that an exception for commercial activity prevented the defendants from claiming immunity under the statute.
The Ninth Circuit affirmed the order on other grounds, saying that the Pangang Companies had not shown that they were foreign instrumentalities, within the meaning of FSIA, where they relied solely on allegations in the indictments to establish corporate ownership.
In November 2021, the defendants again moved to dismiss based on foreign sovereign immunity common law jurisprudence, and additional allegations purportedly establishing that they were foreign instrumentalities under FSIA. White again denied the motion, and the Pangang Companies appealed.
During the pendency of the appeal, the U.S. Supreme Court decided Turkiye Halk Bankasi A.S. v. United States, referred to in yesterday’s opinion as “Halkbank II,” in 2023.
In that decision, the high court held that district courts have jurisdiction over criminal prosecutions, under 18 U.S.C. §3231, even when the defendants are “foreign states or their instrumentalities” and that FSIA does not grant immunity in such cases. The court left open the possibility that foreign states and instrumentalities in criminal proceedings may still have immunity under federal common law.
Lack of Precedent
Acknowledging “the lack of directly controlling precedent” in the area of foreign sovereign immunity as it relates to criminal prosecution under federal common law, Collins relied on civil and government-enforcement jurisprudence.
Turning to the Restatement (Second) of Foreign Relations Law (1965), he wrote:
“According to its assessment of the state of the common law at the time, both the domain and the scope of foreign sovereign immunity were circumscribed. According to §66(g), a corporation fell within the domain of foreign sovereign immunity only if it was ‘created under [a foreign state’s] laws and exercis[ed] functions comparable to those of an agency of the [foreign] state.’…And…the scope of an eligible entity’s immunity did not extend to ‘proceeding[s] arising out of commercial activity outside [the foreign state’s] territory.’ ”
Collins pointed out that “both sides agreed at oral argument that §66(g) of the Restatement best states the common-law standard for assessing the domain of foreign sovereign immunity in the criminal context” given that “FSIA’s enactment in 1976 effectively froze the application, and thus the development, of the common law with respect to state-owned entities until Halkbank II.”
Applying those guidelines, he said that a company seeking protection against prosecution must show that it is the kind of entity that falls within the domain of foreign sovereign immunity and that the organization’s conduct is covered by the doctrine’s scope. The court found that the Pangang Company’s assertion of immunity failed at the first step.
Collins remarked:
“Neither the allegations in the indictment nor anything else in the record establishes a prima facie claim that the Pangang Companies exercise functions comparable to those of an agency of [China]. The documents in the record primarily address the Pangang Companies’ ownership structure and the specific actions they allegedly took….They paint a portrait of an ordinary commercial enterprise engaged in the production of steel and non-ferrous metals. But that sort of conventional corporate entity is not one that ‘exercis[es] functions comparable to those of an agency of the state.’ ”
The defendants argued that the theft of the trade secrets at issue involved sovereign techniques, in the form of espionage, and accomplished the state objective of developing technologies for the clean production of titanium dioxide. Rejecting these assertions, Collins opined:
“[T]he commercial espionage alleged here is not a function comparable to that of an agency of the state and therefore does not qualify the Pangang Companies for immunity under § 66(g). Not all acts of espionage are necessarily sovereign in nature.”
Commercial Gains
Continuing, he reasoned:
“At most, the Pangang Companies can point to the fact that the commercial gains that flowed from the stolen trade secrets helped to achieve the…publicly identified priority of developing [clean titanium dioxide] production technology….[A] generalized public benefit from a commercial enterprise’s economic exploitation of stolen trade secrets is not enough to transform that industrial espionage into the exercise of a function comparable to that of a state agency.”
He added:
“[T]o the extent that we had any residual doubt about the correctness of our conclusion, principles of deference to the political branches on matters touching on foreign relations firmly counsel against recognizing foreign sovereign immunity here.”
Pointing to the “prosecution pursued for 13 years,” he said deference was due to the “Executive Branch’s considered judgment that the companies do not qualify for immunity.”
The case is U.S. v. Pangang Group Company Ltd., 22-10058.
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