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Wednesday, May 22, 2024

The US Hits Huawei With New Charges of Trade Secret Theft

Competitors have long accused Chinese telecommunications giant Huawei of corporate espionage. Now the company is facing US federal charges over what prosecutors call a decades-long conspiracy to steal trade secrets.

On Thursday, the Department of Justice filed a 16 count indictment against Huawei that included charges under the Racketeer Influenced and Corrupt Organizations Act (RICO). The indictment alleges that as long ago as 2000, Huawei stole trade secrets from at least six US companies. The companies aren't named, but previous lawsuits by Cisco and Motorola against the Chinese company are mirrored in the indictment.

The new filing incorporates charges from an earlier indictment, released last year, alleging that Huawei misled banking partners about violations of US sanctions against Iran and that the company stole trade secrets from T-Mobile. Huawei CFO Meng Wanzhou, the daughter of the company's founder, Ren Zhengfei, was arrested in Canada on those charges in late 2018. She is still in Canada under house arrest while fighting extradition to the US. The new indictment alleges that in addition to Iran, Huawei sold equipment to North Korea.

Huawei didn't respond to a request for comment, but told The Wall Street Journal that the indictment “is part of the Justice Department’s attempt to irrevocably damage Huawei’s reputation and its business for reasons related to competition rather than law enforcement.”

As for the RICO charge, “the ‘racketeering enterprise’ that the government charged today is nothing more than a contrived repackaging of a handful of civil allegations that are almost 20 years old,” the company said.

By using the RICO act, the DOJ is alleging that Huawei didn’t just commit one or more crimes but essentially operated an ongoing criminal enterprise, says Joshua Rich, partner and general counsel at the Chicago-based intellectual property law firm McDonnell Boehnen Hulbert & Berghoff.

The previous indictment already posed a significant threat to Huawei. If convicted of defrauding banks to conceal its dealings with Iran, Huawei could be excluded from the US financial system, which would make it much harder for the company to do business around the world. The RICO charges give prosecutors yet another way to block Huawei from US banks if it isn’t convicted on the fraud charges. "It's not just an escalation but a doubling down," says Jacob S. Frenkel, a former federal prosecutor who's now a government investigations and securities enforcement attorney for Dickinson Wright.

Frenkel says Huawei will most likely try to negotiate a plea deal to avoid the most extreme consequences. The new charges will give the US government more leverage in those negotiations.

The indictment follows the signing last month of a "phase one" trade deal with China. President Trump had previously floated the possibility of intervening in the case against Meng as part of trade negotiations with China.

Complaints about Huawei’s alleged theft of intellectual property are hardly new. Cisco sued Huawei in 2003 over claims that the Chinese company had not only copied source code from Cisco products but also copied text from user manuals. The companies settled out of court. So did Motorola, which sued Huawei in 2010 alleging that the Chinese company had knowingly received Motorola trade secrets.

Previous allegations against Huawei came from a former employee of the defunct Canadian telecommunications equipment company Nortel. Brian Shields, former Nortel senior adviser for systems security, told the CBC in 2012 that hackers working for Huawei had stolen passwords from Nortel executives, giving Huawei access to the company's trade secrets, in an operation dating back at least to 2000. (These allegations aren’t a part of the indictment.)

The DOJ in a statement described the various ways Huawei is alleged to have stolen trade secrets, including entering into confidentiality agreements and then violating the agreements, recruiting employees to take their IP from their former employers, and using professors in research institutions to provide technology to the company.

While the charges aren’t related to fears that Huawei could facilitate spying on behalf of the Chinese government—which the company has denied doing or would do—they could bolster the government's efforts to convince other countries to ban Huawei's equipment from new wireless networks, Rich and Frenkel say. Thus far the UK and European Union have resisted an outright ban.

Last year the US Department of Commerce added Huawei to a list of companies considered a threat to US national security, meaning it would need permission to acquire technology developed in the US, including microchips and operating systems such as Android.

Similar restrictions almost forced another Chinese telecom company out of business in 2018 when the US government imposed sanctions on ZTE for selling equipment to Iran. The US backed eventually backed down on the requirements.

Huawei was in a better position to survive those restrictions than ZTE, and founder Ren has claimed that the company is prepared to weather those restrictions by designing its own chips and building its own mobile operating system. But losing access to the US financial system as a result of one or more of the DOJ's charges would be a more serious blow to the company.

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