In the third and final installment of this trade secret litigation series (be sure to check out part one and part two), we visit hypothetical U.S. company SFilm as it pursues its hard-fought relief against a Chinese competitor that had stolen its most valuable trade secrets. After winning a federal jury trial, pursuing multiple nonlitigation efforts and cooperating in the U.S. government’s investigation of the defendant’s actions, SFilm may finally obtain financial compensation and return of its technology. But the fight is far from over. SFilm faces yet further obstacles from the defendant, running the gamut from corporate reorganizations designed to shield assets to protracted enforcement litigation designed to run up costs.
Facing a large jury verdict and a federal government investigation normally would cause a defendant to surrender. But the Chinese company has every incentive to delay and impede enforcement of SFilm’s judgment. For SFilm’s competitor, there is no “plan B” because there never was any business model other than to steal trade secrets.
Unlike in typical litigation, where resolutions can be encouraged by appealing to long-term or mutually advantageous business goals, the Chinese company is convinced there is nothing to be gained by backing down. It responds to the U.S. judgment with press statements that the jury was misled, and that it will prevail on appeal. But behind the scenes, it engages in subtle maneuvers designed to thwart any possible recovery.
What does it do? First, it manipulates its vast corporate structure. It then uses that new array of subsidiaries and affiliates to declare large, unprecedented dividends to the “shareholders.” It also forms a series of spinoff corporations to move assets out of its own corporate name.
It then refuses to post a bond to secure the judgment for the appeal. Recognizing that the lack of a bond will allow SFilm to start collection efforts, the Chinese defendant manipulates its customers and the supply chain. It moves the point of sale from the U.S. to China and engages resellers to move the goods to the existing U.S. customers. This effort is designed to thwart customs actions against incoming goods.
The Chinese company also enters into prepayment schemes with its customers, where, for a discount off the price, the customers send the money to China in advance payment for ordered goods. This impedes garnishment actions against the U.S. customers. And it starts to move money out of U.S. banks and into local and regional Chinese financial institutions.
The Chinese company’s actions are not limited to the courtroom or the corporate boardroom. The company engages a public relations firm and places articles in friendly forums, all railing against the “unfairness” of U.S. the legal system, questioning the intelligence of the individual jurors and pointing out how the defendant’s story was not heard in the U.S. The articles play up the notion of American imperialism and a biased court system to try to sway public opinion away from the real issue—the technology theft.
The Chinese company’s attempt to portray itself as the victim of a bullying and biased U.S. legal system has a specific agenda—to try to build a political case in China that will ensure that any enforcement attempts by SFilm in China are thwarted based on “public policy” considerations.
How can SFilm respond to the multifaceted legal, corporate and media attacks? Here are several actions SFilm takes to respond to these aggressive post-verdict actions.
1. Issue post-verdict discovery. The post-judgment litigation rules allow for broad post-judgment discovery into the Chinese company’s ability to pay the damage award. This is done as soon as possible after the verdict, even though SFilm does not have a complete picture as to the other side’s financial structure. Immediate discovery requires the placement of a document hold on the adverse party and allowing SFilm to generate a comprehensive picture of its competitor’s assets over time, including just before the verdict.
2. Start collection efforts against the adverse party’s customers. Too often, plaintiffs hesitate to start immediate collection efforts, knowing the issue will not be fully resolved until the appeal is decided. When a bond is not posted, however, collection can begin immediately. In addition to obtaining monetary results (such as collecting accounts receivable due to the adverse party), SFilm undertakes a vigorous collection enforcement plan to provide more discovery into efforts undertaken to avoid judgment, and counteract aggressive moves to institute prepayment or reseller schemes. SFilm’s collection efforts put enormous pressure on the Chinese company because customers begin to question whether the defendant will be able to meet their supply needs in the future.
3. Begin trying to freeze assets in banks and other financial institutions. It is possible to begin actions against foreign banks with offices located in the U.S. that may hold the defendant’s money. Moreover, in certain circumstances, the actual location of that money (i.e., whether it is physically kept in the U.S. branch or a foreign main office) is irrelevant. Asset recovery laws give SFilm wide latitude to attempt to collect assets with a U.S. presence, which in some cases allow money from overseas to be collected.
4. Pursue “turnover” proceedings. Most plaintiffs believe enforcement against an international company requires “domestication” of that judgment in the foreign country. True, but most states also have laws that allow a U.S. court to order a defendant to disgorge assets to the plaintiff to satisfy a judgment. In these cases, the actual location of the defendant is irrelevant; by virtue of personal jurisdiction over the defendant, the court has the authority to transfer the assets. If the company refuses, it faces possible contempt proceedings and even more onerous remedies.
5. Pursue a PR strategy. The multifaceted public relations strategy involving the media and government actors discussed in prior installments of this article does not end when the jury returns a verdict. SFilm knows that foreign companies are more and more willing to aggressively protest a perceived “unfairness” of the American judicial system when they lose. These protestations must be answered, both to ensure that SFilm’s positions are accurately portrayed, and to keep political and business pressure on the defendant until the award is paid.
These are just some of the strategies SFilm employs to counteract the attempts at enforcement evasion by an unrepentant defendant. SFilm knew the case would not end after the verdict, and it rightly planned and budgeted for this work before the verdict.
SFilm wins its fight. The Chinese defendant faces actual enforcement of the award through attachment of its assets; a customer base that begins to erode through lack of confidence that the Chinese company will stand behind its business commitments if it is so willing to flout the law; and increasing hostility from its own government as it attempts to maintain good political relations with the U.S. and to convince the world it will protect IP rights. The Chinese company finally agrees to an appropriate monetary settlement and to return SFilm’s stolen secrets. SFilm’s technology-driven competitive advantages in the marketplace are restored; its capital investments protected; and its stock price moves sharply upward. The fight has been well worth it.
Unfortunately, the hypothetical story of SFilm is not an exception to the rule. Its battle to protect its trade secrets and fight on an international stage to recover its technology and appropriate damages was critical to its survival. Fortunately, SFilm crafted a broad-based litigation, business and political strategy both at home and abroad, all facets of which contributed to securing its victory. SFilm appreciated not only the challenges of international legal enforcement of IP rights, but also the opportunities inherent in international government peer pressure associated with protecting technology. SFilm’s legal innovation matched its product innovation.