Bloomberg News

Pangang and Kolon, Like Edward Snowden, Elude U.S. Charges (1)

July 18, 2013

China’s Pangang Group Co. and Korea’s Kolon Industries Inc. (120110) have eluded U.S. criminal charges of trade-secret theft for months. Unlike fugitive security contractor Edward Snowden, they aren’t hiding from authorities.

Pangang and Kolon can’t be forced yet to face the accusations in court because federal rules dating to the 1940s require prosecutors to issue a summons the old-fashioned way -- by mailing it to a U.S. address. The companies said they don’t have offices, employees or agents in the U.S. and can’t be served. Federal judges in California and Virginia have mostly agreed.

Prosecutors must file papers today telling a judge in San Francisco how they will proceed with Pangang while a judge in Richmond, Virginia, is scheduled to hear arguments in Kolon’s case.

The issue threatens to derail the case against Pangang. The company was charged in San Francisco last year with conspiring to steal secrets from DuPont Co. (DD:US) about titanium dioxide, a white pigment used in paint, plastics and paper. Kolon and five of its executives were charged in October with stealing trade secrets from DuPont related to the manufacture of Kevlar, the anti-ballistic fiber used in police and military gear.

“This is simply a procedural glitch, but one that’s not insignificant or easy to resolve,” Mark Wine, an intellectual property attorney in Irvine, California, who isn’t involved in either case, said in a phone interview. Prosecutors may prevail, while “it’s hard for them to get to first base on this stuff because they’re blocked,” he said.

Mounting Evidence

President Barack Obama’s administration has made the protection of U.S. intellectual property a priority due to mounting evidence that China and other countries are behind a campaign to hack into U.S. agencies and corporations to steal trade secrets.

During Obama’s first term, the U.S. Justice Department has brought at least 20 economic espionage and trade secret cases, mostly against individuals, according to a White House report in February. Three cases are against foreign companies, and in two -- Pangang and Kolon -- the U.S. is battling just to get the companies to appear in court.

Prosecutors are required to serve summonses on defendants by delivering copies to officers or legal representatives and mailing copies to the defendants’ last known U.S. address, according to federal rules of criminal procedure.

Sets Policy

The Justice Department, saying the procedures have fallen behind the “new reality” of a global economy and electronic communications, recommended the committee allow the serving of summonses outside the U.S. by agreed-upon delivery methods with foreign jurisdictions, according to an October letter from then-Assistant Attorney General Lanny Breuer to the committee.

The rules pose an obstacle to prosecuting foreign companies, Georgetown University Law Center professor Sara Sun Beale said in a March memo to members of a Judicial Conference of the United States advisory committee on criminal rules. The Judicial Conference, comprised of federal judges, sets policy for U.S courts. Beale is a reporter to the committee, according to a report on the committee’s April meeting.

“We have a proposal in the Criminal Rules Committee to deal with this situation now. It is a problem,” Breuer, now a partner at Covington & Burling, said in an e-mail in April.

A rule change could take months, or longer. A subcommittee may be formed to study the Justice Department proposal and the recommendation needs approval by the conference, which meets twice a year, said Charles Hall, a spokesman for the organization.

“Basically it’s a slow process,” he said by phone.

Jeff Randall, a lawyer for Kolon at Paul Hastings LLP, said the Justice Department never told the judge overseeing the Kolon case that it was seeking to change the service standards. He said in a phone interview that the government “was perfectly willing to ignore” the mailing requirement in order to push these cases through the courts.

Delivered Summons

Federal prosecutors in San Francisco delivered a summons to a New Jersey entity they said was owned by Pangang and mailed a summons to an address in Petaluma, California, for a Pangang unit that was registered as a foreign corporation in the state from 2003 to 2008, according to court filings.

Pangang, which is based in Chengdu, in the Sichuan Province of China, has never employed anyone in the U.S. and has never had an office or operations here, Robert Feldman, an attorney for the company at Quinn Emanuel Urquhart & Sullivan LLP, said in court filings. The firm represents Pangang for the limited purpose of challenging the summonses, he said in court filings.

“I’m not here,” Feldman told U.S. District Judge Jeffrey White in San Francisco at a hearing in April.

White has ruled that the summonses weren’t properly served because prosecutors hadn’t shown that the entities were controlled by or agents of Pangang.

At Standstill

“We don’t believe that there are other steps that the U.S. can take to effect service on the Pangang defendants,” Assistant U.S. Attorney John Hemann told White at a hearing in May. “We’re at a standstill in terms of further efforts to bring them into the case.”

White gave Hemann until today to explain how the government intends to proceed. Hemann didn’t return a voice-mail message seeking comment.

“Judge White simply applied the rules,” Feldman said in a phone interview. “As to the people who are considering a rule change, they had better be careful what they ask for, because turnaround is fair play, meaning American companies may end up being served in circumstances we may regret.”

Three calls for comment to the general telephone line of Pangang Group went unanswered.

Kolon, based in Gyeonggi, South Korea, was charged with trade secret theft and obstruction of justice, according to an indictment that includes a forfeiture claim seeking at least $225 million in alleged criminal proceeds from the company.

Mailed Summons

In October prosecutors mailed a summons to the company’s last known U.S. address in New Jersey, e-mailed the summons to a worker listed on the company’s website as a contact for the fiber product and served summonses on the president and treasurer of Kolon USA in New Jersey, according to a summary of the government’s attempts compiled by U.S. District Judge Robert Payne in a court filing. Payne is presiding over the case in Richmond.

An FBI agent went to the treasurer’s home and demanded that his wife accept service, according to Payne.

Prosecutors also sent a copy of the summons to the government of the Republic of Korea in accordance with a Mutual Legal Assistance Treaty. MLATs, as they are known, are agreements between countries allowing the exchange of information in criminal and related matters.

A summons was delivered to Kolon two days after the company was scheduled to appear in Virginia for arraignment on the charges, according to court documents.

Payne ruled in February that delivering the summons to Kolon USA wasn’t sufficient because the government hadn’t shown that Kolon USA is an agent of Kolon Industries in Korea or was set up as a legal shield for the company. Since the summons via the treaty arrived too late, it didn’t count either, he said.

‘Absurd Result’

Payne’s decision included a silver lining for prosecutors. He said a mailed summons to a U.S. address wasn’t a requirement and another one could be served on Kolon in Korea.

“To find that a foreign corporation could effectively immunize itself from prosecution” by “maintaining its principal place of business outside the country would reach an absurd result,” Payne said.

Another summons was delivered to Kolon in Korea under the treaty in May. The company is seeking to have the summons and indictment thrown out, claiming MLATs can’t be used for that purpose, U.S. lawyers hired by Kolon to challenge the summons said in a June court filing.

Peter Carr, a Justice Department spokesman, and Zachary Terwilliger, a spokesman for U.S. Attorney Neil MacBride in Alexandria, Virginia, declined to comment.

Civil Trial

In September 2011, Kolon lost a $920 million jury verdict to DuPont in a civil trial in Richmond over the theft of Kevlar trade secrets.

Kolon hired Paul Clement, the U.S. solicitor general in the George W. Bush administration, to challenge the award. A federal appeals panel in Richmond hasn’t ruled yet.

In 2011, DuPont sued Walter Liew, an Orinda, California, businessman whom prosecutors accused of selling DuPont trade secrets to Pangang so it could develop a pigment manufacturing facility in China. The lawsuit was put on hold after the Justice Department filed criminal charges against Liew. The department later filed a superseding indictment to include Pangang. In May, attorneys for DuPont said the allegations in the revised indictment “support imposition of civil liability against Pangang” and that it will amend its suit to add Pangang as a defendant.

Gregg Schmidt, a DuPont spokesman, declined to comment on the cases.

Various Steps

On June 27, prosecutors filed an indictment against Sinovel Wind Group Co. (601558), a Chinese wind-turbine company, in federal court in Madison, Wisconsin. Sinovel and two executives are accused of stealing trade secrets from its former U.S. supplier. Sinovel has until Aug. 16 to challenge the government’s attempts to serve the company.

On July 8, prosecutors outlined the various steps it took to alert Sinovel to the charges, including mailing a summons to people who the government said are registered agents in Delaware and Texas.

The government’s criminal copyright case against Kim Dotcom’s Megaupload Ltd., which began in January 2012, has been frustrated by the service requirement. Lawyers for Dotcom and the company have asked that Megaupload be dismissed from the indictment until the government hands Megaupload its charging documents in accordance with federal court rules. The request has been pending since November.

The case is U.S. v. Kolon Industries, 12-cr-00137, U.S. District Court, Eastern District of Virginia (Richmond). The Pangang case is U.S. v. Liew, 11-cr-00573, U.S. District Court, Northern District of California (San Francisco).

To contact the reporters on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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