On 28 January, the Department of Justice (DoJ) announced the issuance of several federal charges against Chinese telecommunications company Huawei, including theft of trade secrets and obstruction of justice. According to the DoJ indictment, Huawei conducted a years-long effort to systematically steal intellectual property from competitors, including Washington State-based T-Mobile US, Inc.
“Today we are announcing that we are bringing criminal charges against telecommunications giant Huawei and its associates for nearly two dozen alleged crimes,” Acting Attorney General Matthew G. Whitaker told the press.
As part of the proceedings against the company, charges were filed against top-level Huawei executive, Meng Wanzhou, chief financial officer of the Chinese tech giant and the daughter of its founder and president, Ren Zhengfei. Meng is currently awaiting extradition to the United States after being apprehended in Canada.
It is far from happenstance that Meng is being singled out. According to DoJ, the CFO was complicit in one of Huawei’s more serious crimes: circumventing U.S. sanctions on Iran. Allegedly, Meng arranged fraudulent wire transfers and other financial “conspiracies” in order to do business with Iranian companies. These crimes go all the way back to 2007, when Huawei lied about their relationship to an Iran-based company called Skycom, falsely asserting it was not an affiliate of Huawei. Since that time, the company continued to maintain that it had only “limited operations” in Iran and that Huawei did not violate American laws or regulations related to the Islamic Republic. Eventually, U.S. investigators uncovered that Huawei operated Skycom as an unofficial affiliate in Iran and that Meng had even served on the company’s board of directors. Huawei’s illicit dealings with Iran (and the fact they tried to cover it up) will, without a doubt, add more thrust to the copyright infringement-related charges against the company.
When the Paranoia is Confirmed
Huawei has found itself in American media headlines more and more over the past several years. Suspicions that the company (along with other fellow Chinese firms) were collaborating with the Chinese government to steal intellectual property and even use their products for China’s intelligence collection efforts, have triggered several crackdowns by the Trump administration. American companies were forced to scrap collaborative plans with Huawei. U.S. military personnel were prohibited from purchasing the company’s products.
Some critics of the government’s policies claimed that the actions against Huawei and other firms in PRC were politically motivated and allegations were being overblown. The DoJ indictment shows that concerns over the company’s scheming are far from baseless. If even a fraction of these very serious charges end up being true, it would be incredibly damning for Huawei.
Has China Reached a Tipping Point?
For anyone with a cursory knowledge of trends in the world of intelligence, the recent announcement by Justice —as well as all the other allegations against Chinese tech over the recent period— come as no surprise. From the perspective of trade secret breach and business espionage, it has for long been a staple of intelligence studies that China presents the greatest threat to the United States.
The question is not whether China represents a very serious problem in this area. That much is certain and has been for quite some time.
The real question is: Will China begin to recognize the serious problems within its business culture and take steps to make things right?
Recent events show room for optimism.
China’s Soul Searching
Over a year ago, China’s President Xi Jinping delivered a speech to the country’s Central Financial and Economic Leading Group on the topic of improving China’s “business and market environment.” While being less than explicit, Xi touched on many of the problems affecting PRC’s ability to engage in global commerce. Xi spoke of out-of-date laws and a lack of transparency in foreign firms dealing with authorities. Arguably, Xi’s most important recognition was China’s weakness in enforcing copyright laws. “Property rights protection, especially intellectual property [IP]protection, is an important aspect of shaping a good business environment,” said Xi.
Chinese authorities have actually been backing up these words with action. Over the past several years, Chinese courts have begun to get serious on cases regarding IP crimes.
Nearly five years ago, in a landmark case, a Beijing court found guilty Zhou Zhiquan, CEO of movie downloading website Siluhd.com, on several counts of copyright infringement. Zhou was sentenced to five years imprisonment and fined 1 million yuan ($160,000). Siluhd.com was deemed as the country’s largest illegal high-definition movie downloading website, providing tens of thousands of high-definition Blu-ray movies as well as videos and television programs. Its registered members had once exceeded 1.4 million. Zhou’s other six co-workers were sentenced to one to three years jail time. According to Chinese media, the judgment was “the first ever” dealing with the country’s online copyright infringement.
Since then, several more high-profile case were adjudicated regarding charges of fraudulent merchandise. In a now well-known series of cases, Chinese courts sided with toy Danish manufacturer Lego on several accusations of copyright infringement. The first ruling in favor of Lego came in late 2017, after Lego identified two Chinese companies selling almost indistinguishable knockoffs. A year later, a district court in the major commercial center of Guangzhou City ruled that four more companies had “infringed multiple copyrights of the Lego Group and conducted acts of unfair competition by producing and distributing [toy] building sets.” The companies were ordered to cease production of these products and forced to pay over half a million dollars in damages to Lego. This case as well was an important indication of the real strides PRC has been making on the IP protection front. “We believe these decisions are well-founded in the facts and the law, and clearly demonstrate the continued efforts of Chinese authorities to protect intellectual property,” Lego Chief Executive Niels B. Christiansen said in a statement.
Reforms: Better Late than Never
China’s effort to protect copyrights have gone beyond individual busts and crackdowns. Over the past several months, China has substantially upped its game by reforming many aspects of its legal and administrative infrastructure, all in an effort to be better equipped in the IP enforcement realm. Last October, China approved changes to litigation procedures in patent and other IP cases. According to experts, the move “fundamentally altered” for the better judicial processes of technical disputes on IP. A month later, almost immediately following the G20 Summit in Argentina, PRC authorities announced a series of fresh penalties for copyright infringement. The new punishments would deliver a heavy blow to companies committing intellectual property theft by restricting their access to borrowing and state-funding. Perhaps the biggest revamping of China’s legal structure vis-a-vis property rights came just a few weeks ago. In early January, a new IP appeal court in China that was set up to handle highly technical cases has begun operating. Dubbed the Intellectual Property Tribunal, the court will serve as the definitive judicial body on IP disputes.
These improving trends have not gone unnoticed by legal and market analysts. The changes Beijing is implementing present a major reversal in the Chinese system. For many years, foreign companies were always reluctant to seek enforcement of intellectual property protection in China. A combination of challenging litigation processes, low damage compensation, the lack of ability to effectively enforce judgments, and even allegations of protectionism by the courts, made it all but futile to file an IP claim in China. Now, that seems to be changing.
Was Trump the Catalyst?
Which brings us to the big question: What was the root cause for all of this substantial reform?
To be sure, there are certainly several factors at play. For one, PRC has slowly come to the realization that protecting IP is the most beneficial policy in the long run. If things keep moving in the current direction, no one is going to benefit more than the Chinese. The rapid changes in PRC’s legal system are creating an increasingly attractive home for foreign companies to do business. The fact that China is making all the improvements speaks to the wonders of an open market system. While no human system is perfect, for the most part, free trade influences its participants to play fair. China wants its citizens to have access to the world’s innovation in products and services. It also wants the capital that comes with those companies setting up shop in the country. At least in the long term, there is no way to “fake” an attractive business environment. You actually have to play by the rules. China has begun to understand this more and more. And the government is now enforcing those rules with a vengeance.
Another element that no doubt has been influential are developments within Chinese society itself. Approximately 1.3 million applications were filed at the State Intellectual Property Office of China (SIPO) in 2016. That’s more than received at the United States, Japanese, Korean, and European patent offices combined. Chinese authorities understood that maintaining a low standard on IP protection will not only hurt the hundreds of thousands of present-day hopeful inventors, it will also damage the motivation for future ones.
On top of these strictly market factors, it would be foolish to ignore the political element.
The ongoing schism between China and the U.S. (sometimes oversimplified as “the trade war”) was started in large part because of America’s suspicions of Chinese copyright infringement. Many of the tariffs implemented on Chinese products by the Trump administration were specifically crafted in response to those crimes. The figures of the tariffs were based on the government’s estimates of the lost corporate earnings to U.S. firms caused by China’s alleged IP theft or forced technology transfers.
The fact that Chinese IP reform is picking up traction now is no coincidence. China’s been forced to recognize just how damaging IP dysfunction has been to their business environment. And Trump’s tariffs have been a major factor in that realization.
It remains to be seen how cooperative China will be in the current Huawei case. As part of their reform effort, China recently began collaborating with U.S. authorities on identifying IP infringements.
The question is: Will these positive trends continue?