On March 16, 2021, the U.S. Court of Appeals for the D.C. Circuit affirmed defendant Shan Shi’s conviction for conspiracy to commit theft of trade secrets. Given recent efforts at the state and now federal level to ban non-competes, employers may be more likely to consider partnering with law enforcement to remedy trade secret theft.
The Court’s opinion begins with the statement, “We can’t always get what we want, but, sometimes, we get what we need.” Unfortunately, the Court’s opinion continues, what Shi’s company needed were seven documents containing a competitor’s trade secret information for manufacturing drill riser buoyancy modules (“DRBMs”), a highly valuable technology used for drilling miles of steel pipe that extend from drill ships to the ocean floor and for carrying oil from natural deposits tens of thousands of feet below the surface.
In March 2014, Shi, a Ph.D. with twenty-five years of engineering experience in offshore structural design, established Houston, Texas-based Construct Better Materials International (“CBMI”), a wholly owned subsidiary of Taizhou CBM-Future New Materials Science and Technology Co., Ltd. (“CBMF”), a technology company sponsored by the Chinese government. At the time, neither Shi nor anyone at CBMI or CBMF knew how to manufacture DRBMs. Only four major companies in the world produced DRBMs—namely, Cuming Corporation, Balmoral, Matrix, and Trelleborg AB (“Trelleborg”).
To study U.S. technology relating to the manufacture of DRBMs, Shi and two of his colleagues visited Trelleborg’s factory in Houston, and explored potential partnerships with other DRBM manufacturers. During these visits, Shi observed Trelleborg’s measures to keep its proprietary information confidential, including 24-hour security guards and video surveillance, visitor logs, keypad entry on restricted areas (e.g., research and development labs), escorts for visitors, and strict rules against taking pictures.
After Shi was unable to secure a partnership with any of the DRBM manufacturers, Shi hired two former Trelleberg employees. In the hiring process, these former Trelleborg employees informed Shi about additional measures Trelleborg took to protect its confidential information, including Trelleborg’s non-compete and non-disclosure provisions that required Trelleborg’s former employees not to reveal “any trade secrets or confidential information” they learned through their employment at Trelleborg.
Through these two former Trelleborg employees, Shi and his CBMI colleagues obtained seven documents containing Trelleborg’s trade secret DRBM technology. Using this trade secret information, Shi’s company was so successful at replicating Trelleborg’s DRBM technology that CBMI entered preliminary talks with Trelleborg’s Executive Vice President about potentially selling CBMI’s DRBM technology to Trelleborg. However, Trelleborg eventually decided not to purchase CBMI’s DRBM technology because it was too expensive. It is unclear if Trelleborg lodged a criminal complaint with federal law enforcement authorities against Shi and CBMI but it appears likely that they did.
Approximately two years later, when Shi and one of his colleagues attended a meeting to pitch their technology to a company they believed to be Lockheed Martin, FBI agents arrested them.
Shi, CBMI, CBMF, and five co-conspirators were charged with conspiracy to commit theft of trade secrets. Three co-conspirators pleaded guilty, one co-conspirator absconded before trial, and CBMI and CBMF never appeared, leaving Shi as the only defendant to stand trial.
To prove Shi guilty of conspiracy beyond a reasonable doubt pursuant to 18 U.S.C. § 1832, the government needed to show that (1) Shi entered into an agreement with at least one other person to commit theft of trade secrets; (2) he knowingly participated in the conspiracy with the intent to commit the offense; and (3) a member of the conspiracy committed at least one overt act in furtherance of the conspiracy. United States v. Smith, 950 F.3d 893, 895 (D.C. Cir. 2020). After three days of deliberations, the jury returned a guilty verdict.
On appeal, the D.C. Circuit rejected Shi’s contention that the evidence presented at trial was insufficient to allow a rational juror to find that he knowingly joined an agreement to steal trade secrets. The court held that the testimony provided by Shi’s co-conspirators—specifically, that (1) Shi hired one of the former Trelleborg employees after he told Shi that he had “some friends at Trelleborg” who would give him Trelleborg’s confidential data; and (2) Shi hired the other former Trelleborg employee after he told Shi that he kept “technical data from Trelleborg”—was sufficient for a rational juror to find that Shi entered into a tacit agreement to manufacture DRBMs using stolen trade secrets.
The appellate court also rejected Shi’s contention that the evidence was insufficient to show that Shi and at least one co-conspirator believed the appropriated information contained trade secrets. The Court pointed to Shi’s co-conspirator’s testimony that he understood that he “did wrong” by asking his friends for “confidential information” that Trelleborg “wouldn’t put . . . outside.”
The Court also summarized three independent bases on which the jury could conclude that Shi believed the data he received contained trade secret information that Trelleborg took reasonable measures to protect, namely, that: Shi visited Trelleborg’s factory and personally observed the high-level security measures that Trelleborg had in place to protect its DRBM manufacturing capabilities; testimony from government witnesses that Shi and others working in the field would know that DRBM manufacturers considered their manufacturing data to be proprietary; and Shi’s decision to draft CBMI’s own non-disclosure agreement after learning about Trelleborg’s non-disclosure and non-compete provisions.
The Court upheld the 16-month prison sentence and $342,000 fine levied against the Houston resident.
This criminal prosecution, a joint effort between the U.S. Attorney’s Office for the District of Columbia and the Department of Justice’s Computer Crime and Intellectual Property Section, underscores the U.S. Department of Justice’s growing expertise at prosecuting relatively complex intellectual property crimes.
Given the renewed bipartisan effort in Congress to pass the Workforce Mobility Act, a bill that would ban all employee non-compete agreements, it is conceivable that in the very near future employees nationwide might find themselves with greater employee mobility to leave one employer for another. If that happens, we could see an immediate uptick in federal criminal investigations and prosecutions involving allegations of theft of trade secrets.
Time will tell if we will see many more cases like the Shi case. At a minimum, with the changing legal landscape favoring employee mobility, employers who typically resorted to emergency civil actions to enforce non-compete provisions, confidentiality agreements, and trade secrets protections may find themselves working increasingly with federal law enforcement authorities to vindicate their trade secret rights under federal law. Similarly, companies that are growing their businesses in highly specialized industries may need to consult with experienced white-collar criminal defense counsel who have expertise in handling cases relating to employee mobility, non-compete agreements, and both civil and criminal trade secret laws.
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