U.S. Defeat in Micron Trade-Secrets Case Reveals Struggle Countering Beijing

U.S. Defeat in Micron Trade-Secrets Case Reveals Struggle Countering Beijing
U.S. Defeat in Micron Trade-Secrets Case Reveals Struggle Countering Beijing

Summary

The verdict against the Justice Department is regarded as a setback in efforts to contain Chinese corporate theft.

U.S. officials across the political spectrum have described Chinese corporate theft as a defining threat of our times. A Justice Department loss last week underscores the challenges in addressing it.

When senior engineers and managers at the Taiwan factory of the U.S. chip maker Micron Technology left abruptly with hundreds of internal files nearly a decade ago for a rival teaming up with a Chinese government-owned company, it looked to prosecutors like an open-and-shut case of state-sponsored corporate theft.

A federal judge in San Francisco disagreed, acquitting Chinese state-owned company Fujian Jinhua Integrated Circuit last week of charges of economic espionage and conspiracy. It was a crushing defeat in a case the Justice Department had made the centerpiece of a yearslong push dating to the Trump Administration to protect domestic companies from Chinese efforts to steal American corporate secrets.

Trade-secret prosecutions have been viewed across administrations as a promising avenue for deterring Chinese entities, but U.S. authorities have struggled. Prosecutors have pursued some cases in which the facts were murky, and later faced hurdles in proving criminal intent.

“There are limits to prosecuting cross-border trade secrets cases involving China given it is nearly impossible to produce evidence or witnesses," said Jimmy Goodrich, a China and semiconductor expert advising the Rand Corp.

Other tools in the U.S. arsenal, such as sanctions or restricting Chinese access to U.S. technology, can impose greater costs on China, but they also come with risks of unintended consequences, including backlash for U.S. companies. Domestic firms are concerned about Chinese government behavior but don’t want to lose access to China’s huge market.

Micron’s pivot

Micron’s shifting posture since the Justice Department brought the case in 2018 illustrates the point. The company had urged U.S. authorities to pursue the criminal case and limit access to U.S. technology for Jinhua, and it filed its own civil lawsuit. In 2022, it lobbied for sweeping Commerce Department restrictions on exporting advanced chips to China, and the blocking of exports to another Chinese rival, Yangtze Memory Technologies, according to people familiar with the matter. It spent more on lobbying in the past two years than any prior period, according to OpenSecrets, which tracks political spending.

But in May, Chinese officials banned major Chinese companies from buying from Micron, in what was widely viewed as a retaliatory response, saying its products posed a national-security risk.

Micron had gotten about a quarter of its revenue from China, half of which risked being wiped out. It moved to reach a confidential settlement in its six-year lawsuit against Jinhua, made a series of high-profile diplomatic visits and announced a new $600 million investment in China.

Micron Chief Executive Sanjay Mehrotra met with China’s commerce minister in November and later pledged to investors a strong commitment to be a major chip supplier for smartphones in China.

Mehrotra has been asked to testify about Micron’s China concerns before the House Select Committee on the Chinese Communist Party, but has been reluctant to do so, for fear of further inflaming tensions, according to people familiar with the matter.

Micron declined to answer questions from The Wall Street Journal.

Burden of proof

Idaho-based Micron is the U.S.’s only company that makes a type of memory chip used to store data in everything from cellphones to laptops. It provides close to one-third of the world’s supply.

The chip technology at issue in the criminal case is now generations old, but few other companies possess it, and it is difficult to replicate.

In 2016, the Chinese government identified memory-chip technology as a national economic priority because Chinese companies hadn’t yet developed their own capabilities. The provincial government in Fujian funded its own multibillion-dollar effort and made a deal with United Microelectronics Corp., a Taiwanese semiconductor company that trades on the New York Stock Exchange, to provide the research while Jinhua would make the chips.

In 2018, Micron’s lawyers went to prosecutors with a laptop that had belonged to a former Micron engineer who left for UMC, which they found covered in filth in a packed storage room. The engineer appeared to have downloaded Micron trade secrets to his Google account and then searched for how to wipe data from the laptop.

U.S. prosecutors ultimately charged Jinhua, UMC and three managers in the case.

President Donald Trump in 2019 touted the government’s efforts in front of the United Nations, saying his administration was “seeking justice" for Micron.

In 2020, UMC pleaded guilty to trade-secrets theft and agreed to pay a fine and cooperate in the prosecution of Jinhua, but said it never gave Jinhua information about Micron’s technology.

At trial, that became a problem for the Justice Department. Prosecutors didn’t call any UMC engineers to testify on the nature of their collaboration with Jinhua.

At closing arguments in September, prosecutor Laura Vartain Horn argued that the two companies were working hand-in-glove, pointing to bonus payments Jinhua made to an ex-Micron manager at UMC who took the material.

A lawyer for Jinhua argued that the government’s case was built on nothing more than conjecture, and that no evidence showed Jinhua knew that employees who left Micron took the company’s intellectual property with them.

On Tuesday, U.S. District Judge Maxine Chesney acquitted Jinhua, saying the government hadn’t provided sufficient evidence to convince her that the former Micron employees had acted at Jinhua’s direction to commit theft.

A spokesman for the U.S. attorney’s office in San Francisco declined to comment. Jinhua said in a statement that it welcomed the verdict and “has always operated in accordance with the law and respected intellectual property rights."

The Chinese Embassy in Washington said China opposes American efforts to use the courts to curb Chinese technological and scientific progress.

“The Chinese government attaches great importance to the protection of intellectual property rights of foreign enterprises, and has treated them equally and safeguarded their legitimate rights and interests," said a spokesman, Liu Pengyu.

Death of a Trump-era initiative

The verdict was the final nail in the coffin for an initiative announced in 2018 by U.S. Attorney General Jeff Sessions.

Dubbed the China Initiative, it aimed to target national-security threats emanating from China, including espionage and trade-secrets theft. But prosecutors lost a series of cases stemming from that effort before Micron, including some cases that appeared to misread scientific collaboration. The initiative drew criticism from Asian-Americans and civil-rights groups who said it potentially fueled racism and cast American scientists with ties to China as spies.

On Friday, a federal judge in Atlanta tossed out nine of 10 counts in another long-running case stemming from that effort. Gee-Kung Chang, a professor of electrical engineering at Georgia Tech, had collaborated with the Chinese telecom company ZTE and faced criminal charges of wire fraud and conspiracy in connection with that work. He has pleaded not guilty.

After President Biden came to office, his administration disbanded the initiative and has been more selective in the cases it brings.

For its part, Micron appears to have weathered the saga well.

Analysts project its revenue will grow 46% this fiscal year after plummeting in 2023 in the midst of a supply-demand mismatch for memory chips coming out of the pandemic, which led to huge losses and deep cuts. The artificial-intelligence boom promises to catapult Micron’s business, and the announcement last week that Micron will start mass-producing chips for the AI chip juggernaut Nvidia sent its stock up as much as 7%. Its market capitalization is approaching an all-time high.

Write to Aruna Viswanatha at aruna.viswanatha@wsj.com and Heather Somerville at heather.somerville@wsj.com

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