In a press release last week, the U.S. Justice Department announced charges against a group of international conspirators for allegedly stealing trade secrets from an unidentified Houston company. Those charged include four U.S. citizens, two Chinese nationals, and a Canadian national. The beneficiary of the alleged theft appears to be a China-based company with funding from the Chinese government.
The trade secrets at issue concern a product known as “syntactic foam” – a material used in underwater military equipment (e.g. submarines) and other under water vehicles. Sources report that the syntactic foam is rare, with only a handful of companies worldwide manufacturing the material. Those same sources report high barriers to market entry: new market entrants need significant resources to develop the intellectual capital and technology to produce the foam. Here, the plot’s conspirators figured it easier to just steal the trade secrets.
According to the Justice Department’s statement, the China-based company set up a subsidiary in Houston where its executives targeted U.S. employees with knowledge on how to produce the foam. Through cash payments and high-paying positions, the newly-formed subsidiary lured several former and current employees from the Houston company to spill the trade secrets, which were then passed to the China-based company. Soon the China-based company began selling the syntactic foam at low price, even boldly pitching some product to the Houston-based company—the company it stole from.
Suspicions were raised after the China-based company’s rapid progress in the industry. Sources report that in April 2017 the conspirators were caught through a sting operation conducted by the FBI.
This case serves as a cautionary reminder that competitors, especially new market entrants to a select industry, may launch targeted raids against a company to steal its trade secrets. Because of instances like this, it is recommended that a company have comprehensive non-compete and non-disclosure agreements in place in order to protect itself against these campaigns. Although in certain circumstances the agreements may not stop the theft, they can be useful for civil recourse and monetary recovery. We will continue to monitor the developments of this criminal case and also monitor whether a similar civil suit gets filed.