Trade secrets are often a company’s most valuable asset, whether those secrets involve cutting-edge medical research or the formula for Coca-Cola. Businesses must take significant steps to protect these valuable “crown jewels” at all costs, whether by securing them on a network or a locked room, encrypting them, or restricting employee access on a need-to-know basis. But these precautions don’t always protect the data as intended and valuable information can slip into the wrong hands, causing substantial harm to the business including, if the wrongdoer can be identified, costs pursuing damages in civil litigation.

Last week the U.S. Attorneys’ Office for the Southern District of Ohio announced that Yu Zhou, a Chinese national, pleaded guilty to conspiring to steal trade secrets from his employer for the benefit of the Chinese government. Zhou, along with his wife, Li Chen, admitted to conspiring to steal medical research aimed at treating several different liver diseases and a rare condition affecting premature infants. Chen pled guilty in July 2020. Zhou and Chen worked in different research labs at an Ohio hospital for nearly a decade. Their employment gave them access to the valuable scientific research which, they agreed, could be sold for personal profit in China. To facilitate their scheme, they established a company in China through which they would sell the research to others connected with the Chinese government, including the National Natural Science Foundation of China. They also co-founded their own company, GenExosome Technologies in the United States, which would sell products and services related to the technology.

The hospital had established protocols to protect its information, including (1) restricting physical access to research labs; (2) requiring employees to wear identification badges and sign security and confidentiality agreements; (3) establishing policies to protect patents and prohibit conflicts of interest; (4) requiring third parties to sign non-disclosure agreements; (5) restricting computer access; and (6) conducting regular training on handling confidential information. Despite these protections, Chen and Zhou were able to access and remove data and establish companies in China and the United States to profit from their theft.

Zhou and Chen have yet to be sentenced but face years of imprisonment plus heavy monetary sanctions and forfeiture orders. Their convictions, however, highlight a key concern of the United States, recently described by Director of National Intelligence John Ratcliffe as the Chinese government’s strategy to “rob, replicate, and replace” American intellectual property.[1] The Department of Justice (DOJ) has, in turn, increasingly focused on protecting American innovation and technology from misappropriation by the Chinese government.

DOJ’s focus on trade secret theft is a key component of the “China Initiative” rolled-out by DOJ two years ago. On November 16, 2020, the two-year anniversary of the initiative, Attorney General William Barr announced that “the Department has made incredible strides in countering the systemic efforts by the [People’s Republic of China] to enhance its economic and military strength at America’s expense … [and] is committed to holding to account those who would steal, or otherwise illicitly obtain, the U.S. intellectual capital that will propel the future.”[2] The initiative “prioritizes use of the Department’s core tool, criminal investigation and prosecution, to counter economic espionage and other forms of trade secret theft.”[3]

The DOJ’s increased interest in investigating these crimes has resulted in multiple indictments for economic espionage since the start of 2020. In total, DOJ has charged five cases involving theft of trade secrets for the benefit of China and an additional ten cases with “some alleged nexus to China.”[4]

DOJ’s early focus was on educating and protecting those in academia who might be viewed as easier targets for these thefts given the open idea-sharing that is central to academic research. But the criminal charges unveiled this year reveal that the initiative is expanding.

Zhou and Chen, for example, underscore the value of medical research that might be targeted – a topic that is particularly acute given the ongoing COVID-19 pandemic. In fact, DOJ reported that it had charged several individuals associated with the Chinese Ministry of State Security in connection with global hacking campaigns targeting biomedical researchers conducting COVID-19 research.[5]

In February 2020, DOJ announced the sentencing of a Houston man, convicted of trade secret theft and related crimes, for setting up a subsidiary for a Chinese company in the U.S. that was used to steal trade secrets in connection with the manufacture of an engineered-foam material used in oil and gas drilling.[6] Later that same month, DOJ announced that a Chinese national had been sentenced for stealing trade secrets from his employer, a petroleum company, involving the development of battery technology.[7] DOJ has also announced charges or convictions related to theft of trade secrets from semiconductor manufacturers and oil and gas producers.[8]

Inevitably, businesses in all sectors must be vigilant to protect their valuable trade secret information. Those that have relationships with China-based distributors, manufacturers, or the like should employ enhanced due diligence and ensure the adequacy of their firewall protocols to silo trade secret information. Obviously, not every connection to China puts a company at risk for theft, but China’s willingness to facilitate, and pay for, misappropriated American research and technology creates a tempting environment for employees and business partners to steal trade secrets. Enhanced due diligence and periodic background checks are now critical to maintaining the secure environment a business needs to protect its proprietary information.

[1] John Ratcliffe, “China is National Security Threat No. 1,” Wall Street Journal Op-ed (Dec. 3, 2020).

[2] U.S. Dep’t of Justice, “The China Initiative: Year-in-Review (2019-20),” No. 20-1238 (Nov. 16, 2020).

[3] Id.

[4] Id.

[5] See id.

[6] See U.S. Dep’t of Justice, “American Businessman Who Ran Houston-Based Subsidiary of Chinese Company Sentenced to Prison for Theft of Trade Secrets,” No. 20-174 (Feb. 11, 2020).

[7] See U.S. Dep’t of Justice, “Chinese National Sentenced for Stealing Trade Secrets Worth $1 Billion,” No. 20-242 (Feb. 27, 2020).

[8] See, e.g., U.S. Dep’t of Justice, “Chinese Citizen Convicted of Economic Espionage, Theft of Trade Secrets, and Conspiracy,” No. 20-598 (June 26, 2020); U.S. Dep’t of Justice, “Chinese Energy Company, U.S. Oil & Gas Affiliate and Chinese National Indicted for Theft of Trade Secrets,” No. 20-1182 (Oc. 29, 2020).