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Trial to begin in economic espionage case involving China

Trial to begin in economic espionage case involving China

Case one of few to be prosecuted under rarely used provision of Economic Espionage Act

A jury trial is set to begin in a somewhat rare trade-secret theft case in which federal prosecutors are trying to prove that two engineers misappropriated trade secrets from a U.S. technology company to benefit China's government.

The case is being prosecuted under a rarely used provision of the Economic Espionage Act (EEA) of 1996, which deals with the theft of trade secrets for the benefit of a foreign nation. The law was passed in response to a perceived need to protect U.S. trade secrets and intellectual property from foreign government-sponsored theft.

There have been only five cases so far in which individuals have been indicted under this provision in the EEA. Last June, Xiaodong Meng, 44, a software engineer born in China, became the first to be sentenced under the law.

Meng was sentenced to two years and ordered to pay a fine of $10,000 after he pleaded guilty to, among other things (PDF document), stealing at least six source-code products and more than 100 other software components from his employer, Quantum 3D Inc.

The current case is being heard in U.S. District Court for the Northern District of California and involves Lan Lee, a U.S. citizen and Yuefei Ge, a Chinese national. Both individuals were arrested in June 2006 for allegedly stealing trade secrets from their employer, NetLogic Microsystems (NLM), and another company, Taiwan Semiconductor Manufacturing Company (TSMC).

They are accused of then using the stolen information to establish a start-up and of having tried to get funding for it from a Chinese government initiative called the "863 program." Both men have pleaded not guilty to the charges against them. Jury selection in the case began today and the trial is set to begin on Wednesday.

The case is significant because to win, prosecutors will need to prove that the defendants knew their alleged theft would benefit the government of China, said Todd Sullivan, partner with Womble Carlyle Sandridge & Rice, PLLC. That is different from most trade-secret theft cases, which involve prosecution under a separate provision of the EEA that criminalizes domestic espionage, he said.

"The government has to prove that a foreign government, foreign instrumentality, or foreign agent was involved," in the theft in order to win a conviction, Sullivan said. It is unclear what kind of evidence the government has in its possession to back-up its allegations in this case, he said. But based on the fact that prosecutors are pressing ahead with the trial, they appear to believe they have the evidence linking the thefts to China, he said.

"I am assuming the government has e-mail communications, or telephone conversations, between these employees and agents of the Chinese government," Sullivan said. "Or maybe they have payments going from a Chinese institutions to the engineers."

Court documents filed in connection with the case allege that between May 2002 and July 2003, Lee and Ge illegally downloaded and installed on their systems components of TSMC's software that NLM was using to develop microprocessor products.

Prosecutors alleged that the pair planned on using the misappropriated software to develop and market microprocessors in China and elsewhere via a company called Sico Microsystems Inc, which Lee had established in 2002.

Prosecutors say documents found on computers belonging to Lee and Ge established a link between Sico and China's 863 funding program.

One of the documents found on Lee's computer was a business agreement between Sico and a Beijing-based venture capital firm in which both parties agree to tap the 863 program for funds.

Another document talked about a plan by Sico to bid on a project in China on the 863 plan, while another one was a business plan seeking close to $4 million from the 863 program.

The 863 funding program was apparently set up by China to encourage technology development in the country, especially in areas such as communications, laser technology and military applications.

The indictment papers, however, stop short of directly making any allegations against China, other than implying that the allegedly misappropriated trade secrets would benefit the country.

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Tags securityChina

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