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U.S. in No Hurry to Prosecute China’s Stolen Chip Secrets Case

Joel Rosenblatt

(Bloomberg) -- The Trump administration promised to accelerate prosecutions of American intellectual property theft when it announced charges last year against a state-owned company at the vanguard of China’s effort to become a major player in global semiconductors.

But 10 months after the U.S. Justice Department unveiled the case amid an escalating trade war, a trial is still long way off for the Chinese company, a Taiwan-based firm and three Taiwanese nationals jointly indicted for stealing secrets from Idaho-based Micron Technology Inc.

In a twist, it’s a defendant, Fujian Jinhua Integrated Circuit Co., that’s pushing prosecutors to move to trial in San Francisco so it can prove its innocence. Part of the delay, though, may be because the U.S. Commerce Department has already blocked Fujian Jinhua from competing with Micron.

Delays in complicated prosecutions, especially those involving foreign companies and individuals, are hardly uncommon. But repeated postponements in the case against Fujian Jinhua and Taiwan-based United Microelectronics Corp., or UMC, are notable because it was filed under the banner of the “China Initiative,” a new program aimed at prioritizing trade-theft cases and litigating them as quickly as possible.

“Delays in the case likely hurt Fujian Jinhua, UMC and China economically,” said Preston L. Pugh, a former prosecutor who now represents companies.

Read More: U.S. Deploys New Tactics in Prosecution of Chinese Chipmaker

There appear to be multiple reasons why the case is moving slowly -- not all of which prosecutors can control. There’s been an ongoing struggle over how lawyers for the companies can review the alleged secrets, which they’re legally entitled to do to mount their defense. Micron has objected, for cyber-security reasons, to designating Hong Kong as the meeting place to exchange the information.

Perhaps the biggest source of delays are laptops the Taiwanese government seized from UMC in 2017 in that country’s own trade secrets prosecution of the company. U.S. prosecutors are struggling to get a Taiwanese court’s permission to take forensic images of the devices, which allegedly contain Micron trade secrets and would be key evidence in the San Francisco case.

U.S. District Judge Maxine Chesney recently observed with some reticence that her willingness to keep rescheduling hearings has become “something of a mantra.” U.S. prosecutors declined to comment on the case.

Fujian Jinhua says it’s eager to get to trial, arguing that its very existence is at stake ever since the U.S. Commerce Department blacklisted the company last year -- blocking its ability to buy U.S. chip-making gear and cratering its production plans -- just two days before the China Initiative was announced in November.

“We’ve got a ticking time clock on the viability of the company,” the company’s U.S. lawyer, Christine Wong, told the court in April. “Jinhua is very anxious to have its day in court.”

China is by far the largest market for semiconductors and imported more than $300 billion of the electronic components last year. Building a major supplier of memory chips would help domesticate that industry, but access to machinery made by just a handful of American companies is crucial.

Read More: The Chipmaker Caught in U.S. Assault on China’s Tech Ambitions

Both Fujian Jinhua and UMC have formally acknowledged receiving the U.S. indictment -- not always a given in prosecutions of overseas companies, which sometimes play hard to get. But the three individual defendants -- each of whom face the prospect of a prison term if convicted -- may not necessarily share the same eagerness for a speedy trial.

The recently postponed arraignments of the three, including Fujian Jinhua president Chen Zhengkun, or Stephen Chen, probably reflects their ambivalence about the risks they face, according to Pugh. But China has no authority to get them to appear because all three men are Taiwanese nationals, he said. Neither country has an extradition treaty with the U.S.

Fujian Jinhua spokesman Chad Kolton and Leslie Caldwell, a lawyer for UMC, declined to comment. Mary McNamara, a lawyer representing Chen, and a representative of Micron didn’t respond to requests for comment.

As delays mount, Fujian Jinhua says it’s been unfairly targeted and denied “basic norms of due process.”

“Instead of awaiting the outcome of a fair trial in an American court,” Fujian Jinhua said, the Commerce Department “appears to have decided in advance of the merits of the case -- which is, at its core, a trade secrets dispute -- and simultaneously imposed a very harsh penalty.” In May, Fujian Jinhua filed a petition seeking to be removed from the list.

The Commerce Department said when it first put Fujian Jinhua on the list that the company’s production of DRAM chips “threatens the long term economic viability of U.S. suppliers of these essential components of U.S. military systems.” The agency declined to comment further.

Paul S. Chan, a lawyer who represents companies and individuals in investigations, said he isn’t aware of the U.S. “preemptively” using the Entity List in the past to exert economic pressure on a foreign company while charges are pending but no judgment or findings of export violations have been reached.

Delay in the criminal case helps the U.S. and Micron because Fujian Jinhua has been “called out as a company engaged in espionage” and can’t operate -- all while the government has generated good publicity from the indictments, Chan said.

“I don’t necessarily accept at face value that the government wants these cases to resolve quickly,” he said. “Especially here, where prosecutors have trade sanctions or economic sanctions already in place in the interim. I think they need a good result in the end, I don’t think they necessarily need to prosecute the case quickly.”

The case is U.S v. United Microelectronics Corp., 18-cr-00465, U.S. District Court, Northern District of California (San Francisco).

--With assistance from Ian King.

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Peter Blumberg, Joe Schneider

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