Intellectual Property Law

trade secrets in china: a cautionary tale

By Obi

it's widely known that the p.r.c. is not a great place in which to deposit one's trade secrets.  yet the other advantages of setting up shop there have induced foreign companies to roll the dice with their proprietary information, often deluding themselves into believing that the special measures they put in place to protect the family jewels will be sufficient to counter the centuries old cultural belief that information is to be shared, not hoarded.

acetic acid is a low-tech product, a compound that gives vinegar its sour taste, produced in nature by cooperative bacteria that cause ethyl alcohol to react with oxygen, freeing up a water molecule and binding an oxygen atom to what i suppose would otherwise be formic acid in order to make acetic acid. naturally, commercial producers of acetic acid are not willing to let their fortunes ride on the health and welfare of vats of bacteria.  they employ a methanol carbonylation process developed by monsanto and bought by b.p. chemical in 1986.  as practiced by b.p., that method employs trade secrets.

in the 1990s, b.p. licensed the use of this process to a company in china, presumably of its own free will.  the company was the shanghai-wujing chemical plant.  meantime, the chinese government decided that a major acetic acid production facility (not owned or operated by b.p.) would be built in zhenziang city,  in 1992, the shanghai petrochemical engineering company (s.p.e.co), a business formed to engage in major chemical engineering projects, was hired by s.o.p.o., a government-owned chemical company, to build the plant.  s.p.e.co in turn contracted with u.s. vendors to fabricate the  necessary equipment to produce acetic acid using a low-pressure methanol carbonylation process supposedly invented in china.

there aren't that many vendors of methyl carbonylation equipment, and b.p. chemicals had used them all, disclosing its trade secrets to them as necessary to allow proper fabrication of the hardware.  in 1995, b.p. discovered that -- you guessed it -- s.p.e.co was giving vendors specs that were very similar to the b.p. specs -- in some cases, "shameless copies", as the court later found.

b.p. sued s.p.e.co, s.o.p.o. and one american vendor in federal district court in missouri for misappropriations of trade secrets.  s.p.e.co did not defend, and default judgment was entered against it.  unfortunately, by then, there was nothing left of s.p.e.co, and the judgment was noncollectable.  the american vendor settled and agreed to cooperate with b.p. in its action against s.o.p.o., which did appear in court to avoid being defaulted.  s.o.p.o.'s appearance to dismiss for lack of subject matter jurisdiction due to china's immunity from suit under the foreign  sovereign immunity act.  the court granted the motion on the grounds that s.o.p.o. hadn't acquired b.p.'s trade secrets in the u.s.

b.p. appealed.  the 8th circuit held that b.p.'s case involved not just acquisition of trade secrets, but use and disclosure of trade secrets in meetings in the u.s. between s.p.e.co and hardware vendors.  b.p. alleged that s.p.e.co was acting as s.o.p.o's agent in those meetings.  it reversed the judgment, and the case went back to district court, where b.p. found that it might not have enough evidence to show prove the agency it had alleged, and accordingly amended its complaint to allege a civil conspiracy between s.o.p.o. and s.p.e.co.  s.o.p.o moved to dismiss again, on the basis that the facts alleged did not establish that s.p.e.co was its agent, and that s.o.p.o. hadn't itself conducted sufficient commercial activity in the u.s. to fall within the commercial activity exception to the f.s.i.a., and also that there were insufficient contacts between s.o.p.o. and the missouri forum to sustain jurisdiction over the chinese government-owned company.

the court found that at least 20 s.o.p.o employees visited at least 11 u.s. vendors between 1994 and 1996, and discussed and tested equipment being built for s.p.e.co  from b.p.'s specs.  the court found this to have been commercial activity for purposes of the f.s.i.a.., and that enough of it had occurred in missouri with the vendor b.p. had sued to constitute the minimum contacts necessary for personal jurisdiction over s.o.p.o.

it was now s.o.p.o.'s privilege to appeal.  the 8th circuit held that b.p. had identified its trade secrets to the court with sufficient specificity to state a claim of misappropriation, and had identified the specific acts of s.o.p.o. that constituted misappropriation of those trade secrets.with sufficient specificity to establish "commercial activity" under the f.s.i.a.  that commercial activity was also sufficient to constitute minimum contacts with the missouri forum for purposes of personal jurisdiction. 

the case is now back in the hands of the district court, over four years after that court fist dismissed  it.  the parties will now move toward trial, no doubt stopping on the way to  submit and argue motions for summary judgment.   the lesson of the b.p. case -- aside from the time and expense it has taken to get beyond the preliminary skirmishes -- is not that it is an instance of trade secrets being misused in china, but that a chinese government agency may have been complicit in the misuse, and if so was either so totally oblivious of the fact that it was doing something wrong or so confident of its sovereign immunity that it sent emissaries to the united states to engage in that misuse.

Full post as published by TechLawyer on September 03, 2005 (boomark / email).