Should Companies Like ZTE That Steal Intellectual Property Face Export Controls? (H.R. 7036)

What is H.R. 7036?

(Updated December 22, 2018)

This bill — the ZTE Theft Act — would remove the requirement that certain covered entities prove they were irreparably harmed when seeking preliminary injunctions in civil actions for patent infringement. It’d also make covered entities eligible for export privileges only if they maintain an export eligibility account and certify to the Attorney General that they have entered into license agreements with the U.S. persons that own patents they’re using, will abide by U.S. law, and won’t engage in cyber espionage or the theft or misappropriation of intellectual property or trade secrets on their own behalf or to benefit foreign countries.

For the purposes of this bill, covered entities are entities that:

• Are providing or producing telecommunications, software, or electronics equipment;

• Has a headquarters or principal place of business located in a region administered or governed by the People’s Republic of China (excluding Taiwan);

• Were denied export privileges on or after March 8, 2016; and

• Were subsequently removed by the Secretary of Commerce from the List of Denied Persons maintained by the Bureau of Industry and Security of the Department of Commerce upon the restoration of such privileges.

Argument in favor

Economic growth and innovation are undermined by intellectual property theft and patent infringement. Businesses that don’t abide by IP law shouldn’t be allowed to continue conducting business and getting ahead of the competition through dirty tactics.

Argument opposed

The Commerce Department is already actively addressing patent issues and intellectual theft. Individual companies are also vigilant about their own IP, filing cases in court and pursuing other remedies — such as royalties — for patent infringement.

Impact

Foreign companies; patent thieves; intellectual property; Chinese companies; U.S. Code; and the Attorney General.

Cost of H.R. 7036

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Rep. Steve Chabot (R-OH) introduced this bill to hold foreign-owned companies accountable for illegal business practices and patent theft by tying their continued export eligibility to their business conduct. In a statement to the House Committee on Small Business, Rep. Chabot argued that many foreign-owned companies engage in intellectual property theft for their own gain, and on behalf of their home governments:

“[F]oreign backed firms from countries like China and Russia regularly… steal intellectual property and undermine America’s critical infrastructure. The FBI has already determined that foreign state actors pose a serious cyber threat to the telecommunications supply chain. It is also clear that many foreign nations are responsible for direct cyber attacks on the United States in an effort to steal intellectual property and sensitive personal information.”

President Trump has accused China of “unfair and harmful acquisition of U.S. technology,” which hurts American companies and discourages innovation. David Kline, an intellectual property strategist, points out that ZTE is a prime example of this:

“A search of PACER (the national index of federal court cases) reveals that in the U.S. alone, ZTE has been sued for patent infringement an astonishing 126 times just in the last five years. This number is even more shocking when you consider that only a subset of companies who believe their IP rights have been violated by ZTE has the means or the will to spend the millions of dollars needed to wage a multi-year lawsuit in federal courts. But ZTE’s IP thievery is not confined just to the United States. According to one Chinese tech publication, ZTE has also been sued for patent infringement an additional 100 times in China, Germany, Norway, the Netherlands, India, France, the United Kingdom, Canada, Australia, and other countries. As an intellectual property renegade, ZTE certainly gets around. Even when it’s not being sued, ZTE thumbs its nose at the traditional rules of fair play in intellectual property matters, commonly engaging in delay, misrepresentation, and hold out when dealing with patent owners. While ZTE is more than happy to accept royalty payments for the use of its own intellectual property, it rarely if ever pays for the use of others’ IP.”

The U.S. Trade Representative (USTR) reported in 2017 that overall theft of American IP costs $225-600 billion annually. Of this amount, it’s unclear what the breakdown is from country to country.

Paul Goldstein, a professor at Stanford Law School, advocates dispute resolution and bilateral investment treaties as the best way to address IP violations:

“Within the confines of trade, that’s a hard question. A friend who oversaw IP policy for the USTR several administrations ago once commented to me that people thought of the USTR as John Wayne rushing into dens of IP iniquity, six-shooters ablaze, when the reality was that he was Archie Bunker shooting off nothing more than his mouth. The US and other countries have achieved important successes under the World Trade Organization’s TRIPs Agreement [Trade-Related Aspects of Intellectual Property Rights] with a dispute resolution process that is far more deliberate than the 301 process. But, although many sober voices have argued for this as the preferable route, it’s far from clear that TRIPs will cover all of the forms of IP appropriation that are the object of the current 301 process, or that the current administration has the will or the patience to follow this avenue. And there are other trade alternatives, such as a bilateral investment treaty with China that could draw on the IP provisions of the so-called TRIPs-Plus free trade agreements with other countries.”

Of Note: ZTE — China’s second-largest telecommunications equipment maker — was first fined in early 2017 for selling millions of dollars’ worth of hardware and software from U.S. technology companies to Iran and North Korea, two nations under U.S. sanctions who should not be able to receive U.S.-based companies’ products. ZTE eventually agreed to pay S$1.4 billion in fines and escrow funds, appoint a new board of directors and install compliance oversight managers chosen by the U.S. After it met these conditions, the ban was lifted. The only punishment specified in case of future violations was the loss of the US$400 million in escrow. However, after ZTE violated its settlement in 2018, the Commerce Department rescinded its ZTE’s export privileges, blocking it from exporting its telecom equipment.

ZTE’s export privileges were restored after the White House intervened in ZTE’s favor. Originally, Congress added a provision to the annual defense bill to reimpose a seven-year ban on ZTE buying gear in the U.S. market, effectively putting the company out of business — but heavy lobbying from the White House led to lawmakers eventually softening their stance to merely preventing the federal government from working with ZTE, Huawei (another Chinese technology company), or “any entities controlled by the government of the People’s Republic of China.”

In December 2018, ZTE was accused of misconduct again, this time for helping the Venezuelan government build a “fatherland card” to track its citizens through a national ID card. U.S. senators suspect that some of the data centers ZTE helped create used Dell equipment, which should not have been sold to Venezuela under the U.S. embargo against that country. A letter to Secretary of State Mike Pompeo, Commerce Secretary Wilbur Ross, and Treasury Secretary Steven Mnuchin, Republican Senator Marco Rubio and Democratic Senator Chris Van Hollen cited a Reuters report about ZTE's provision of a population database for the Venezuelan government, writing:

“ZTE installed data storage units built by Dell Technologies. Though Dell's transaction appears to have been with ZTE in China, we are concerned that ZTE may have violated US export controls by misidentifying the end-user or purpose of the end-use. The Venezuelan government hired ZTE to build a database and develop a mobile payment system for a smart ID card. In developing the database for this ID card, ZTE reportedly embedded its employees in a unit of Venezuela's state telecommunications firm, CANTV — the president of which is subject to US sanctions."

Media:

• Wall Street Journal (Context)

• TechCrunch (Context)