SinoTech

Justice Department Charges China’s Hytera With Conspiring to Steal Radio Technology

By Raquel Leslie, Brian Liu
Friday, February 18, 2022, 10:37 AM

The U.S. Department of Justice unsealed a federal indictment on Feb. 7 charging Chinese telecommunications company Hytera with conspiring with former employees of Motorola Solutions Inc. to steal the American company’s digital mobile radio technology. The partially redacted indictment alleges that the Shenzhen-based company recruited Motorola employees in Malaysia to steal proprietary trade data, source code and hardware designs for its own competing walkie-talkie product. The indictment charges Hytera by name but redacts the names of the other co-defendants in the case, whose indictments remain sealed. 

Hytera, a former distributor of Motorola Solutions products, was charged with 21 criminal counts including conspiracy to commit theft of trade secrets and possessing or attempting to possess stolen trade secrets. If convicted, Hytera would face a criminal fine of three times the value of the stolen trade secrets. Prosecutors allege that from 2007 to 2020, the employees recruited by Hytera accessed trade secrets from Motorola’s internal databases and sent emails that described their intention to use the technical knowledge gained there to help Hytera. These employees also received higher salaries and benefits than what they received at Motorola in exchange for stealing the trade secrets. 

According to the court documents, Hytera and the recruited employees allegedly used the stolen information to accelerate the development of Hytera’s digital mobile radio (DMR) product range, as well as to train its employees and sell its products worldwide. In one February 2008 email, an unidentified employee asked, “Are we going to ‘reuse’ as much as possible or we need to develop most of them from scratch to avoid patent infringement?” 

The allegations mirror two civil complaints filed by Motorola in 2017, claiming its former engineers stole thousands of confidential technical documents and millions of lines of source code for two-way radio technology before heading to Hytera. Hytera told jurors that it had developed its radios on its own. The jury awarded Motorola $764.6 million in damages following a three-month trade secrets trial in 2020, though a judge later reduced the sum to $544 million. The judgment is currently on appeal at the U.S. Court of Appeals for the Seventh Circuit. 

Prosecutors said that in 2017 an unidentified person emailed Hytera’s CEO about “aligning” his story with the civil lawsuit. The indictment also indicates that a Hytera employee who testified in that civil trial lied under oath by claiming an employee of the Chinese company was fired in the fall of 2018 for failing to cooperate with an internal company investigation, when in fact this employee worked for Hytera from December 2018 through at least June 2020.

In a statement sent by its attorneys, Hytera said that it is “disappointed” by the charges and “respectfully disagrees with the allegations,” adding that it is “committed to honoring the intellectual property rights of others.” Mark Hacker, Motorola’s executive vice president and general counsel, said in a statement that the charges against Hytera “underscore the calculated and deliberate character” of the company’s illegal conduct, and that Motorola will continue to pursue civil litigation in multiple jurisdictions. 

The unsealed indictment represents the latest in a series of blows against Hytera in the United States. In November, President Biden signed legislation to prevent Hytera and other Chinese companies that have been deemed national security threats, including Huawei and ZTE, from receiving new telecommunications equipment licenses from U.S. regulators. Under former President Trump, recipients of federal funding were also banned from buying equipment and using services from Hytera. 

The criminal case against Hytera could establish a road map for future criminal trade secrets disputes in the United States. The civil case involving Hytera is already significant because it was the first case to recognize that the Defend Trade Secrets Act (DTSA) established a private right of action for foreign acts of misappropriation that still resulted in some U.S.-based acts. But the indictment against Hytera represents a significant development in the evolving criminal trade secrets law in the U.S. as well, especially given its invocation of the Economic Espionage Act (EEA) of 1996—the first federal statute to make criminal the theft or misappropriation of trade secrets. Both acts include an extraterritoriality provision that can apply against foreign entities when an act “in furtherance” of the offense was committed in the United States. If the criminal case against Hytera proves successful, this would once again confirm that the Economic Espionage Act has broad extraterritorial reach for tackling trade secret theft by foreign companies.

Chinese Ride-Hailing Giant DiDi Lays Off 20 Percent of Employees 

Reports broke on Feb. 14 that Chinese ride-hailing giant DiDi plans to lay off about 20 percent of its employees amid ongoing regulatory scrutiny into the company. According to Chinese media outlet LatePost, the layoffs began in mid-January and will continue until the end of February. An estimated 3,000 people expected to lose their jobs across most departments. The layoffs occur as DiDi prepares to delist itself from the New York Stock Exchange (NYSE) and relist in Hong Kong. 

DiDi initially came under scrutiny after it launched on the NYSE on June 30, 2021. Regulators from the Cyberspace Administration of China (CAC) quickly put the brakes on the initial public offering (IPO) over data security concerns. CAC placed DiDi under investigation on July 2 and prevented it from acquiring new users. DiDi’s apps remain inaccessible to new users as of today, resulting in the company losing more than 70 percent of its market value in the past year. 

The announcement comes as Beijing’s regulatory crackdown has forced several other technology companies into dire financial straits. Many other large technology firms have announced layoffs in recent months, including TikTok parent company ByteDance, video platform iQiyi—the “Netflix” of China, as well as Alibaba and Baidu. The crackdowns have led even ardent supporters of the Chinese government to critique the heavy-handed measures. Hu Xijin, a recently retired editor of the state-owned newspaper Global Times, said in a Weibo post that he hoped that regulations would strengthen companies rather than leaving them “dying on the operating table.” 

DiDi is reportedly exempting its globalization unit from the layoffs, a potential sign that the company views its fortunes as tied to establishing itself in overseas markets. Amid heightened tech scrutiny in both the United States and China in 2021, many other Chinese tech companies have looked to expand overseas. Tencent increased its investments in its overseas startups more than sevenfold in 2021. Alibaba told its investors that overseas e-commerce would be its focus entering into 2022. Amid the CAC security review, DiDi itself launched in Egypt in September 2021, and is reportedly expanding to Nigeria soon. 

There is some indication that the freeze in Chinese IPOs in the United States since DiDi’s crackdown may be thawing soon. Meihua International Medical Technologies, a global medical supplier, is planning to debut this week on the Nasdaq. Though the IPO is expected to raise a relatively small amount—$57.5 million—it would be the first Chinese company to list in the U.S. in nearly seven months. Several other smaller companies, such as wheelchair maker Jin Medical and smart parking system provider Yi Po International Holdings, plan to raise $31.6 and $27 million, respectively, in their U.S. filings. 

Still, these listings may not necessarily usher in any DiDi-sized IPOs back into the United States anytime soon. In the past year, both Chinese and American regulators have imposed substantial procedural roadblocks for larger Chinese companies to list in the United States. On Feb. 15, CAC implemented new rules requiring platform companies with data for more than 1 million users to undergo a security review prior to listing overseas. In December 2021, the Securities and Exchange Commission (SEC) issued a rule to delist foreign companies if they fail to comply with requests for information from U.S. regulators, a move likely intended to target companies from China and Hong Kong. 

The stark reversal of fortune at DiDi, once China’s most valuable startup, is emblematic of the wider travails of China’s consumer tech industry. As the Chinese government continues to push investments away from consumer tech and toward “hard tech,” companies like DiDi may find it difficult to recover to their former heights. 

Other News

Commerce Department Adds 33 Chinese Entities to “Red Flag” List

On Feb. 7, the Commerce Department announced the addition of 33 Chinese entities to its Unverified List (UVL), a “red flag” list that requires vendors to exercise greater scrutiny when transacting with these companies. The list included manufacturers in critical industries, including producers of pharmaceutical products and semiconductor parts. Though inclusion on the UVL is not an outright ban, it imposes greater barriers for Chinese companies to obtain certain U.S. technologies that are subject to export restrictions. 

Companies are included on the UVL when the Bureau of Industry and Security (BIS) is unable to verify the end use or end user of certain shipments to the listed party. Unlike the better-known Entity List or the Specially Designated Nationals list, the Commerce Department does not view the UVL as a punitive measure, in the sense that there is no direct allegation of wrongdoing. However, being listed on the UVL is still a substantial trade barrier. Any vendor seeking to export certain items to a party on the UVL must either apply for a license or obtain documentation from the listed company certifying its compliance with U.S. export regulations. 

China’s commerce ministry decried the move, saying that Washington was engaged in “economic bullying.” For their part, reactions among the listed companies were mixed. Representatives from two of the listed companies told Chinese state-owned media outlet Global Times that the listing had minimal impact on their operations, as they had limited imports from the United States. By contrast, WuXi Biologics, a pharmaceutical company, saw its stock value plummet 26 percent in Hong Kong’s stock exchange after being listed, wiping $9.9 billion off its market value. 

The addition of Chinese companies to the UVL comes amid a larger push for economic competition with China. The House of Representatives passed the America Competes Act two weeks prior, increasing investments in semiconductors and other key industries to better compete with China on the world stage. The Commerce Department under Secretary Gina Raimondo has been particularly aggressive, adding at least 66 Chinese companies since she took office in March 2021. It appears that Raimondo has no plans to ease up on the crackdown: Two days after the UVL announcement, Raimondo pledged to “hold [China] to account” for failing to meet its trade deal purchase targets. 

Bilibili Employee Death Reignites Debate over “996” Culture

The recent death of an online content auditor in China has brought renewed scrutiny to the tech industry’s “996 culture.” The 25-year-old man was employed by Bilibili to police the video clips uploaded to its popular streaming site. After allegedly working from 9 a.m. to 9 p.m. throughout the Lunar New Year holiday, he was suddenly rushed from his home to the hospital on Feb. 4, where he died later that evening of a brain hemorrhage. Bilibili released an internal memo rejecting claims that the employee was overworked, insisting that he had worked standard hours for the past week and that the company had tripled his pay for working during the holiday, according to the law. 

Reports of the employee’s death have reignited debate over the toxic overtime culture endemic to China’s tech industry dubbed “996”—referring to the expectation that employees, especially in the tech industry, work from 9 a.m. to 9 p.m. six days a week. A hashtag related to the man’s death has received hundreds of millions of views on microblogging platform Weibo and sparked a new wave of online outcry against the government for not doing enough to address the problem in the year since a series of high-profile deaths were linked to overwork in 2020. 

Behind China’s sprawling online censorship regime is a large army of full-time and contract laborers hired by platforms like ByteDance, Tencent, and Weibo to police swathes of content for inappropriate and politically sensitive material. Bililibi employs a sizable 2,400 content auditors, amounting to roughly 30 percent of the company’s current head count. These moderators often toil away for long hours in front of the computer, flagging and removing “illegal and harmful” user posts. The “production line” nature of this work, as with factory jobs, comes at a cost to workers’ health. 

In the wake of extensive online outcry, Bilibili released a second statement, insisting that in order to “prevent similar tragedies,” it would “make proactive improvement” to the health of its content auditing team. First, the company has pledged to recruit 1,000 more moderators this year to “reduce their average workload.” Second, the company will pay greater attention to the physical health of employees by increasing physical examinations and establishing an onsite mental and physical health clinic.

Cyberattack on News Corp. Believed to Be Linked to China 

News Corp., the news publishing empire owned by Rupert Murdoch, was the target of a cyberattack that hacked the email accounts of journalists and others at the company, a breach that a cybersecurity consultant believes was likely meant to gather intelligence to benefit China. The attack was disclosed in an SEC filing on Jan. 4. The company said it had discovered the “persistent cyberattack” on one of its systems in January. 

David Kline, News Corp.’s chief technology officer, said in an email to staff members on Feb. 4 that the company had notified U.S. law enforcement and opened an investigation with the digital security firm Mandiant after the discovery. The company believes the breach affected “a limited number” of email accounts and documents from News Corp. headquarters, News Technology Services, Dow Jones, News UK and the New York Post. An email sent to employees added that investigators believe the threat had been contained and that customer and financial data had not been hacked.

While there is no definitive evidence that China was behind the breach, Mandiant assessed that those behind this activity “have a China nexus” and are “likely involved in espionage activities to collect intelligence to benefit China’s interests.” The News Corp. hackers accessed documents that would be of significant interest to Chinese officials, including those related to stories about Taiwan, human rights abuses against China’s Uyghur Muslim minority population, and Biden administration efforts to ramp up protections against Chinese technology. 

The disclosure of the cyberattack on News Corp. came just days after FBI Director Christopher Wray used a speech to highlight the Chinese government’s “thirst for power” and the threat posed by its “massive sophisticated hacking program” to American innovation and economic security. Wray also stated that the FBI is actively investigating more than 2,000 instances of Chinese theft of U.S. data. Liu Pengyu, a spokesman for the Chinese Embassy in Washington, said in an email that he was not aware of the reported details of the attack but affirmed that China unequivocally opposes cyberattacks in all forms. “We hope that there can be a professional, responsible and evidence-based approach to identifying cyber-related incidents, rather than making allegations based on speculations,” Pengyu said.

Commentary

Josh Rogin argues that Biden’s continuation of Trump-era competition policies cements a bipartisan consensus on the need to frame U.S.-China relations in competitive terms. 

Adam Kovacevich likens Biden’s policy of picking legal fights with Big Tech firms at home but defending them abroad as a form of “older brother” protectionism.

Shira Ovide warns against taking an alarmist approach in treating all forms of Chinese technology as a national security threat. 

Chang Che analyzes the growing popularity of and legal troubles faced by Zheli, a metaverse app and WeChat competitor that topped the charts as China’s most downloaded app last week. 

Joshua Park proposes involving more high-tech middle powers like Japan and South Korea in global standards-setting organizations to mitigate the risk of U.S.-China technology competition creating a “splinternet.” 

Gabriel Scheinmann argues that the United States should welcome competition with China over technology and economics as a way of avoiding direct military confrontation. 

Rashi Shrivastava surveys several recent examples of Chinese regulators blocking American acquisitions of Chinese companies. 

James Cooper and Kashyap Kompella posit that, despite popular opinion, the U.S. still enjoys a relative advantage against China in the artificial intelligence race due to greater economic incentives and political freedom for companies to experiment. 

Orit Frenkel argues in support of the Biden administration’s Indo-Pacific Economic Framework (IPEF) as a bulwark against China’s efforts to set global technology standards. 

The Washington Post argues that to win the semiconductor production race with China, the U.S. should not attempt to match China “dollar-for-dollar” but, rather, coordinate with partners in the European Union, Japan, Korea and Taiwan to keep manufacturing out of China.

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