US CHINA TRADE WAR–DEVELOPMENTS IN TRADE, CUSTOMS, PATENTS, ANTITRUST AND SECURITIES

Houhai Lake at Night With Drum and Bell Tower Beijing, China TraDear Friends,

There have been some major developments in the trade, solar cells, Customs, 337/patents, antitrust and securities areas.

TRADE

SOLAR CELLS—BEAT GOES ON

On September 26th there were reports that the United States and China have been negotiating for the past several weeks toward a settlement of existing trade remedy cases affecting Chinese solar cells that would set a minimum floor price and limit Chinese imports.   Apparently, the arrangement would be similar to the one China reached with the European Union, which also included a floor price and provisions aimed at limiting Chinese imports.  Another US objective is to remove Chinese duties affecting U.S. exports of solar-grade polysilicon to China.

Apparently, negotiations have taken place, but it is still unclear how intense the talks are at this time or whether they are anywhere close to a breakthrough.   Sources report that the U.S. Trade Representative (“USTR”), which is leading the negotiations for the U.S. side, has been talking to the domestic manufacturing industury.  As mentioned before since antidumping and countervailing duty orders have already been issued, there cannot be a suspension agreement.

One speculation is that the US and Chinese government could enter into a memorandum of understanding like the U.S-Canada lumber agreement.   Regarding who has more leverage in the negotiations, as described below, with the third country loophole in place, since the Chinese companies can source the cells from Taiwan, Chinese companies may not be that affected by the Trade Remedy orders.  But certain Chinese producers make most of their money by producing solar cells in China, not the modules and panels.

Furhter increasing the pressure, there was quite a flurry in the newspapers as the Chinese Ministry of Commerce (“MOFCOM”) announced on September 20th its preliminary countervailing duty of 6.5% against Polysilicon from the United States against Hemlock and AE Polysilicon.  Other US producers, such as REC Silicon, received a 0% CVD rate. The CVD duty is in addition to the antidumping rates on polysilicon from 53 to over 60% on certain exporters.  See attached announcement.  MOFCOM ANNOUNCEMENT POLYSILICON

One trade publication quoted me stating that “I really think the United States, for the first time, has encountered a trade war,” Perry said. “All of a sudden, when it throws a rock at China, China throws two or three back.”

In addition, certain newspaper assumed that the countervailing duty replaced the antidumping duty against US polysilicon and the newspapers declared victory for the US side.  See http://www.renewableenergyworld.com/rea/blog/post/print/2013/09/china-escalates-trade-war-with-us-over-polysilicon-upping-tariffs-to-63-5

But the reality is quite different.  Just like the United States, the Chinese countervailing duty is added to the antidumping duty against US polysilicon so US producers/exporters are still under enormous pressure because of the Chinese trade case.  The U.S. imports of polysilicon into China were roughly $2 billion, while the imports of Chinese solar cells to the U.S. were roughly $4 billion.  The looming uncertainty has already cost the U.S. manufacturing jobs.  As mentioned in my last post, an August 18th article in the Seattle Times stated that Hemlock Semiconductor, the third-largest polysilicon producer, announced plans in January to lay off 400 employees at its Michigan and Tennessee plants, citing an oversupply of solar panels because of the potential for Chinese tariffs.  The article also stated that REC Silicon said the trade issues caused it enough uncertainty as far back as January of 2013 to delay a $1 billion capacity expansion at its Moses Lake plant in Washington.

The MOFCOM Polysilicon Decision increased pressure on the United States to negotiate a settlement agreement.  On September 23rd, a US solar industry association, the Solar Energy Industrial Association, released a proposed settlement of the solar cells and polysilicon trade cases.  SEIA SETTLEMENT PROPOSAL  In the attached announcement issued on September 23rd, the SEIA states:

“With no end in sight to the ongoing solar trade dispute between the United States and China, the Solar Energy Industries Association (SEIA) is offering an industry compromise between the U.S. and Chinese solar industries, which could serve as the centerpiece for a fair, negotiated settlement of outstanding issues, benefit end users, and encourage the proliferation of solar energy in the United States and globally. . . .

For months, SEIA has been working behind the scenes in Washington and Beijing to resolve the current conflict and head off an escalation of trade sanctions. SEIA has warned U.S. negotiators that any settlement similar to the recently announced EU-China agreement would represent a blow to the U.S. solar industry because of an expected increase in solar prices. SEIA also believes that any resolution of the U.S.-China solar dispute must recognize the interests of all stakeholders, including American consumers, and not just one segment of the industry.

Highlights of SEIA’s proposed solution include:

• Chinese companies would agree to create a fund that would benefit U.S. solar manufacturers directly and help to grow the U.S. market. Money for the fund would come from a percentage of the price premium Chinese companies are currently paying to third-country cell producers to get around U.S. trade sanctions, reducing costs and supply chain distortion for Chinese companies.

• The Chinese government would also agree to end its antidumping and countervailing duty investigations on U.S. polysilicon exports to China, and remove the threat of artificial cost increases in a key raw material in the solar value chain, benefiting not just Chinese solar companies but all users of solar energy.

• In return, the U.S. antidumping and countervailing duties orders would be phased out.”

In other words, the SEIA is proposing that the US Solar Industry and the Chinese solar industry simply come together and sing Kumbhaya, a let’s get together song, and everything will be fine again.  The reality is much different.

Although the United States and Chinese governments apparently are negotiating, the first problem with any settlement agreement is that the Chinese government has to agree.  With the Third Country loophole in place, that is if foreign solar cells are put in Chinese panels and modules, the panels and modules are not in the antidumping and countervailing duty case, Chinese modules and panels are not shut out of the US.  In fact, estimates are that the price difference between Chinese and Taiwan solar cells is an estimated 5 to 10 cents so the prices for modules and panels in the United States have only gone up by about $10.  Such a small prices increase has no impact on the US market.  So unless Commerce closes the loophole on its own or because of Court appeals, the Chinese government has no incentive to enter into such a settlement agreement.

Moreover, the US Solar Cell industry has no interest in such a settlement agreement.  In response to SEIA proposal, US counsel representing the US solar cell producers, including Solar World, indicated that they did not have any any intention of giving up unless and until China’s unfair trade practices have stopped.

Counsel for the US industry indicated that his clients are highly skeptical of any arrangement or settlement with China given its history of predatory trade pract1ces.  Since no agreement was negotiated in the initial investigation, getting the US industry’s agreement will be critical to any Solar Cells agreement because the Petitioners, including Solar World, must agree to withdraw their complaint.

This fight will definitely go on.

HARDWOOD PLYWOOD CASE

Another major trade fight is the antidumping and countervailing duty case against Hardwood Plywood from China.  On September 17, 2013, the Commerce Department issued its final antidumping and countervailing duty determinations in the Hardwood Plywood from China case.  As indicated in the attached notice, COMMERCE DEPARTMENT FACT SHEET HARDWOOD PLYWOOD the Antidumping rates range from 55.76% to 62.55% for the mandatory respondents and 59.46% for the rest of the Chinese companies that cooperated in the investigation and 121% for the Chinese companies that did not cooperate.

In the Countervailing Duty case, the three companies that were chosen as mandatory respondents received 0%.  But as mentioned before, even though the Chinese companies that were individually examined received 0%, the Commerce Department’s methodology does not let the Department go negative on the rest of China.  Despite the 0% dumping rates for the mandatory Chinese respondent companies, all other Chinese companies, more than 100 companies, received a 13.58% Countervailing Duty rate.  Fairness Commerce style.

In addition, how did the Commerce Department calculate an antidumping rates of approximately 55 to 62% for Chinese companies?  By using Bulgaria as the surrogate country.  Do you really think that Bulgaria is a more market driven economy than China?  Of course not, but that is not the point.

On September 19, 2013 at the ITC injury hearing Senator Wyden from Oregon testified for the US Industry stating:

“The growing tide of Chinese imports is sinking the boat of the American hardwood plywood industry . . .Left unchecked, these illegal trade practices undermine economic growth, struggling Oregon communities, and encourage more of these unacceptable trade practices by China and others who seek to play by their own rules. . .  American communities that are reliant on manufacturing had been brought “to the brink of economic collapse because of unfair trade.”

But who is the real loser in the Hardwood Plywood case, not the Chinese nor the US hardwood plywood industry.  The real losers in the Hardwood Plywood case are the downstream US producers of cabinets, furniture, boats, paneling and in home construction, crating and packaging, store fixtures, flooring underlayment and many other products, some of which are located in Oregon.

As Mr. Simon, the co-chairman of American Alliance and for Hardwood Plywood, and Mr. Titus, the executive vice president of the US Kitchen Cabinet Manufacturers Association, state in the attached article from the Wall Street Journal, “Protectionists Pick Your Pocket Again, You’ll Pay More for Cabinets, and Anything Made with Chinese Plywood and US jobs will be lost too” WSJ ARTICLE:

“Many thousands of U.S. factories depend on a steady, affordable supply of this plywood for the products they will sell at home and abroad.  Whether those downstream manufacturers sink or swim may be determined in Washington this week in two separate events—a ruling and a hearing.

The damage to U.S. manufacturers that rely on hardwood plywood has already begun. The combined tariffs have jolted supply chains, spiking the cost of imported hardwood plywood and creating painful shortages due to a lack of domestic supply. The first to suffer will be American jobs in manufacturing and woodworking. .. . Today, many U.S. manufacturers that depend on imported Chinese hardwood plywood fear that the tariffs will force the production of cabinets, furniture and other products now made in the U.S. to sites overseas. The domestic kitchen and bath-cabinet industries alone have $8.2 billion in annual sales. But how will the U.S. industry, hit by tariffs, compete with kitchen cabinets and other products made abroad—that can be shipped to the U.S. free of import duties? Competition will come from Canada and Mexico as well as China. . . .

This point was reinforced by Mr. Carl Spencer of Spencer Cabinetry, who testified at the ITC on behalf of the Kitchen Cabinetry industry in the attached article from Woodworking Network, ” Plywood Antidumping Ruling: Upside-Down System of Justice”  See  http://www.woodworkingnetwork.com/wood-blogs/industrial-woodworker/production-industry-guest-blogs/Upside-Down-System-of-Justice-226075531.html?page=2#sthash.wgd6pcex.dpbs

In the Article, Mr. Spencer states:

“My in-depth exposure has convinced me that a lot more American cabinetmakers need to get involved right away. This isn’t just someone else’s issue — our own very existence may be at stake, and it’s ten seconds to midnight. . . .”

“It’s a serious mistake for your readers to think this will not greatly affect them. Whether we buy any imported plywood or not, restricting the longstanding pipeline of hardwood plywood imported for use as secondary wood will trigger spot shortages and drive up prices of all domestic material for everyone.  That is the whole reason the Cartel of Six filed their complaint in the first place. . . .

“even though our hardwood plywood prices will go up a lot, they will not go up for our direct cabinetmaking competitors in China, Canada, Mexico, or elsewhere. As an example, we are already competing every day with Canadian companies, whose primary market is the United States.”

“From our point of view, our own government’s actions amount to a de facto stimulus, not for Americans, but instead for the Chinese, Canadian, and Mexican cabinet industries — all of whom can still buy plywood from China at the true world price. In the end, it is the American cabinet companies that will be punished, especially the small ones, and American jobs that will be lost.” . . .

“As it stands now, over 9,300 of us cabinet companies must now pay them for it for as long as we survive . .  .”

“The handwriting is on the wall. It might be well for the woodworking press to move their headquarters to Canada and have staff who speak Mandarin in order to better keep up with the new American cabinet industry.”

 

When the US government imposes antidumping and countervailing duties on US imports using an unfair process that is tilted in favor of US producers, the Government creates little monopolies.  When the products at issue are raw materials, the real losers are US producers of downstream products, which are either driven out of business because they cannot compete in the downstream market with imports that have access to the cheaper raw materials or forced to close their US production facilities and move to China.

NEW ANTIDUMPING AND COUNTERVAILING DUTY INVESTIGATIONS

MSG

On September 16, 2013, the Commerce Department initiated antidumping and countervailing duty review investigations on Monosodium Glutamate (“MSG”) from China. ITC Notice and Chinese companies in the review are listed below:

ITC NOTICE

Docket No: 2979

Document Type: 701 & 731 Petition

Filed By: Iain R. McPhie

Firm/Org: Squire Sanders (US) LLP

Behalf Of: Ajinomoto North America Inc.

Date Received: September 16, 2013

Commodity: Monosodium Glutamate (MSG)

Country: China and Indonesia

Description: Letter to Lisa R. Barton, Secretary, USITC; requesting the Commission to conduct an investigation under sections 701 and 731 of the Tariff Act of 1930 regarding the imposition of antidumping and countervailing duties on imports of Monosodium Glutamate (MSG) from People’s Republic of China and Republic of Indonesia.

Status: 701-TA-503-504 and 731-TA-1229-1230 (Preliminary)

The Chinese respondent producers and exporters in the MSG case are: Fufeng Group, Meihua Holdings Group, Henan Lotus Flower Gourmet Powder Co., Ltd, COFCO Biochemical (Anhui) Co. Ltd.), Shandong Linghua Monosodium Glutamate Incorporated Co. , Jining Jusheng Gourmet Powder Food Co., Ltd., Shandong Xinle Monosodium Glutamate Foods Co. Ltd.,  COFCO Limited, Ningxia Eppen Bio-Tech Co., Ltd., Huanyu Gelin Food Development Co Ltd., Haerbing Juhua Biotech Co. Ltd, Fujian Province Jianyang Wuyi MSG Co., Ltd., and Shandong Qilu MSG Group Co.,

GOES

On September 18, 2013, an antidumping and countervailing duty petition was filed against Grain Oriented Electrical Steel from China.   Notice and Chinese companies are listed below:

ITC NOTICE

Docket No: 2980

Document Type: 701 & 731 Petition

Filed By: John M. Herrmann

Firm/Org: Kelley Drye & Warren LLP

Behalf Of: AK Steel Corporation, Allegheny Ludlum LLC, and the United

Steelworkers

Date Received: September 18, 2013

Commodity: Grain-Oriented Electrical Steel

Countries: People’s Republic of China, The Czech Republic, The Federal Republic of Germany, Japan, The Republic of Korea, Poland, and the Russian Federation.

Description: Letter to Lisa R. Barton, Secretary, USITC; requesting the Commission to conduct an investigation under sections 701 and 731 of the Tariff Act of 1930 regarding the imposition of antidumping and countervailing duties on imports of Grain-Oriented Electrical Steel from the People’s Republic of China, The Czech Republic, The Federal Republic of Germany, Japan, The Republic of Korea, Poland, and The Russian Federation.

Status:  701-TA-505 & 731-TA-1231-1238

The Chinese respondents in the GOES case are: Anshan Iron & Steel Group Corporation, Hebei Shougang Qian’an Iron & Steel Co., Ltd. (subsidiary of Beijing Shougang Co. Ltd.), Baoshan Iron & Steel Co., Ltd. (subsidiary of Baosteel Group headed by parent company Shanghai Baosteel Group Corporation) (“Baosteel”), and Wuhan Iron & Steel Co. Ltd. (”Wuhan” or “WISCO”).

As indicated below, the ironic point is that the Chinese Government has levied antidumping and countervailing duties on US exports of GOES to China.  Although the US has taken the GOES case to the WTO and won a victory, the orders stay in place in China.  The 3 plus years that the orders have been in place, however, have allowed the Chinese GOES industry to catch up and now export GOES to the US, which is causing problems for the US GOES industry.

In the Steel Antidumping and Countervailing Duty Wars between the US and China, what goes around, comes around.

IMPORT ALLIANCE FOR AMERICA/IMPORTERS’ LOBBYING COALITION

As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of the antidumping and countervailing duty laws against China.

On September 18, 2013, ten US Importers agreed to form the Import Alliance for America.  The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.

We will be targeting two major issues—Working for market economy treatment for China in 2016 and working against retroactive liability for US importers. The key point of our arguments is that these changes in the US antidumping and countervailing duty laws are to help US companies, especially US importers and downstream industries.  We will also be advocating for a public interest test in antidumping and countervailing duty cases and standing for US end user companies.

If anyone is interested in the Alliance, please feel free to contact me.

CHINESE ANTIDUMPING AND COUNTERVAILING DUTY LAW

POLYSILICON

Attached is the Chinese Government’s Ministry of Commerce (“MOFCOM”) September 20th announcement of preliminary countervailing duties to be levied on polysilicon imports from the US.  MOFCOM ANNOUNCEMENT POLYSILICON

SILICON STEEL—GOES

The US battle with the Chinese government on its antidumping and countervailing duty orders against GOES from the US is still being fought out.  In response to the August 12th announcement by MOFCOM that it had met its WTO obligations in the GOES case, on September 11, 2013, the USTR stated that it is “currently evaluating China’s re-determination of antidumping and countervailing duties on GOES from the United States” and that if the Chinese government’s actions are not sufficient to comply with the WTO’s recommendations and rulings, the US could initiate further proceedings at the WTO.

As the recent US antidumping and countervailing petitions against GOES from  China indicate, however, the US GOES industry has already lost its technical/tactical advantage.

Although the US Steel industry complains about Chinese antidumping and countervailing duty cases against US GOES exports, in light of US refusal to use actual prices and cost in China calculate dumping rates and the Commerce Department’s methodology that finds dumping and subsidization in 100% of the cases against China, such criticism has a very hollow ring.

CUSTOMS

HONEY CASE

On September 30, 2013, a US agent for a dozen Chinese honey importers was sentenced to three years in prison for her role in smuggling operations that allegedly avoided nearly $40 million in US antidumping duties. At a federal court hearing in Chicago, Hung Yi lin -who pled guilty last year to three counts of entry of goods into the U.S. by means of false statements- was also ordered to pay $512,852 in restitution, but avoided the six-year prison sentence sought by prosecutors.

Lin, 43, also known as Katy Lin, allegedly played a pivotal role in helping her clients falsify documents on shipping containers loaded with Chinese-origin honey from 2009 to 2012, making it appear that they were filled with sugars or syrups. Through her California-based company KBB Express, Lin brought in $11.5 million of honey into the US avoiding almost $40 million in antidumping duties.

Ms. Lin’s attorney argued that his client was simply a hardworking immigrant, who was merely a freight forwarder and did not profit from the scheme.  Ms. Lin in tears told the US Judge Milton I. Shadur that she was not attempting to flee prosecution, when she was arrested on her way out of the country.  “I’m really sorry if anything I did hurt this country. I came here for my dream . . . .”

In response, however, the Assistant US Attorney argued that the Mr. Lin’s role was absolutely critical in the sophisticated scheme.  The Assistant U.S. Attorney also stressed the damage to the U.S. honey industry when the price of honey collapsed due to the smuggling operation and other similar schemes.

PATENTS

337 CASES

CAFC DETERMINATION –MICROSOFT NO DOMESTIC INDUSTRY UNDER 337

On October 3, 2013, the third day of the Government shutdown, we can say that at least the Courts are open. Today the Court of Appeals for the Federal Circuit (“CAFC”) issued its attached decision in Microsoft v. US International Trade Commission (“ITC”) and Motorola in which Microsoft appealed an ITC determination of no violation in a 337 case.  MICROSOFT DOMESTIC INDUSTRY  The CAFC affirmed the ITC on almost every part of the decision, remanding on one small aspect of one patent back to the ITC.  The most important issue is the its decision on domestic industry, which will effect future 337 cases against China.

In that decision, which is attached, the CAFC dismissed one part of Microsoft’s patent case becasue Microsofit did not establish that the patented invention, the specific patent in question, was actually practiced in the United States and, therefore, there was no domestic US industry with regards to this patented product.  The CAFC stated:

“Microsoft’s failing was simple. Although Dr. Olivier purported to identify “client applications” in an example application that Microsoft provides to third party phone manufacturers, Microsoft failed to show that any such “client applications” are actually implemented on any third-party mobile device.  .  .  According to the ALJ, because Microsoft did not point to evidence that its expert examined client applications in fact running on third-party mobile phones or confirmed how they operated, Microsoft failed to show that there is a domestic industry product that actually practices the ’376 patent.  . . .In this appeal, we do not reach Microsoft’s challenge to the non-infringement determination because we find substantial evidence to support the Commission’s finding of no domestic industry, which suffices to support its finding of no violation based on this patent. There is no question about the substantiality of Microsoft’s investment in its operating system or about the importance of that operating system to mobile phones on which it runs.”

“But that is not enough under the statute. Section 337, though not requiring that an article protected by the patent be produced in the United States, unmistakably requires that the domestic company’s substantial investments relate to actual “articles protected by the patent.”  19 U.S.C. §§ 1337(a)(2), (3). A company seeking section 337 protection must therefore provide evidence that its substantial domestic investment—e.g., in research and development—relates to an actual article that practices the patent, regardless of whether or not that article is manufactured domestically or abroad. . . .”

“We conclude that there is substantial evidence to support the Commission’s determination that Microsoft failed to meet that requirement. . . . The Commission did not lack substantial evidence to support its finding that Microsoft simply failed to identify any actual phones with the required components performing as required.  . . .”

“On that basis, the Commission could find that Microsoft failed to show that any Microsoft-supported products practiced the ’376 patent. We therefore affirm the Commission’s finding of no proven domestic industry, and hence no section 337 violation, involving this patent.”

SUPREME COURT ARGUMENTS ON DOMESTIC INDUSTRY

On September 9, 2013, in Nokia v. US International Trade Commission, Nokia attempted to persuade the Supreme Court to take jurisdiction and overturn the CAFC’s January 2013 decision in Interdigitial Communications LLC et al v.  International Trade Commission and Nokia Inc. that licensing of specific patents by InterDigital in the United States was enough to be a domestic industry under section 337.  Nokia argued that nonpracticing entities should not be considered a domestic industry under section 337.

In response, according to InterDigital, when it ruled that it had satisfied the domestic industry requirement, the CAFC simply followed “the intent of Congress to enlarge the domestic industry requirement to cover licensing activities – when those activities are substantial and connected to exploitation of the patents at issue. . . .”  InterDig Brief

In the attached Supreme Court brief, the ITC sided with InterDigital.  ITC BRIEF  19 USC 1337(a)(3) (C) specifically provides that a domestic industry “shall be considered to exist if there is in the United States with respect to the articles protected by the patent, “substantial investment in the patent’s exploitation, including engineering, research and development or licensing”.  The ITC pointed to record evidence that InterDigitial had “invested a total of approximately $7.6 million in salaries and benefits for employees engaged in its licensing activities, and it received almost $1 billion in revenues from portfolio licenses (including the patents in suit) related to its cellular technology. . . .”

In addition, the ITC pointed to the CAFC’s explanation that in 19 1337(a)(3)(C) Congress intended to protect “innovators who did not actually produce goods in this country, but who were injured by the importation of goods that incorporated the technology that they had invented or sought to license”.

NEW 337 CASE

HANDHELD MAGNIFIERS

On September 26, 2013, a new 337 case was filed against Aumed Group Corp. in China on handheld magnifiers. See notice below:

Docket No: 2984

Document Type: 337 Complaint

Filed By: Matthew B. Lowrie

Firm/Org: Foley & Lardner

Behalf Of: Freedom Scientific, Inc

Date Received: September 26, 2013

Commodity: Handheld Magnifiers

Description: Letter to Lisa R. Barton, Acting Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended regarding Certain Handheld Magnifiers and Products Containing Same. The proposed respondents are Aumed Group Corp., China; and Aumed Inc., San Carlos, CA.

MARINE SONAR DEVICES AGAINST HONG KONG

On September 20, 2013, a new 337 case was filed on Marine Sonar Imaging Devices against a Hong Kong company.  See notice below.

Docket No: 2981

Document Type: 337 Complaint

Filed By: M. Scott Stevens

Firm/Org: Alston and Bird LLP

Behalf Of: Navico Inc. and Navico Holding AS

Date Received: September 20, 2013

Commodity: Marine Sonar Imaging Devices

Description:  Letter to Lisa R. Barton, Acting Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended regarding Certain Marine Sonar Imaging Devices, Products  Containing the Same, and Components Thereof. The proposed respondents are: Raymarine Inc., Nashua, New Hampshire; Raymarine UK Ltd., United Kingdom;  and In-Tech Electronics Ltd, Hong Kong.

NEW PATENT BILL PROPOSES TO MAKE IT MORE DIFFICULT FOR NPES/PATENT TROLLS

The House of Representatives released the attached draft patent bill on September 23, 2013 aimed at making it more difficult for patent trolls, non-practicing entities (“NPEs”), to bring patent cases.  HOUSE PATENT BILL  The bill will raise the pleading requirements, making it more difficult for NPEs to file frivolous suits.  The pleading requirements would also increase the cost and complexity of patent cases.

The bill would also require the losing party in patent cases to pay the costs of the prevailing party unless the judge finds that the suit was “substantially justified,” creating an exception in patent cases to the “American rule” that parties are generally responsible for paying their own attorney’s fees.

NEW PATENT CASES AGAINST HUAWEI, ZTE, HANGZHOU COMPANY AND OTHER CHINESE COMPANIES

On September 9, 2013, ACQIS filed a patent complaint against Huawei.  ACQIS HUAWEI

On September 17, 2013, C. B. Worldwide Inc. filed a patent complaint against Chinese companies, Hangzhou Yizhan Pet Products, Allara China Ltd., Shanghai ITCPC Import and Export Co. and Petlike.  The complaint alleges misappropriation of technology, patent infringement and breach of contract.  CHINA TOYS HANGZHOU

On September 25, 2013, Nidec Motor Corporation filed a patent complaint in the Federal District Court in Missouri against Broad Ocean Motor, Broad Ocean Technologies and Zhongshan Broad Ocean Motor Co., Ltd.

On September 26, 2013, James Grove and LF Products filed a patent case against COSTCO and Global Furniture (Zhejiang) Co. Ltd.  ZHEJIANG COSTCO

On September 26, 2013, SPH America filed patent complaints against Huawei and ZTE.  SPH ZTE   SPH HUAWEI

On September 30, 2013 and October 1, 2013, Super Interconnect Technologies filed patent complaints against Huawei and ZTE.  SUPER INTERCONNECT ZTE   SUPER INTERCONNECT HUAWEI

ANTITRUST

JUSTICE DEPARTMENT’S SYSTEMATIC INVESTIGATION OF ASIAN CARTELS

To illustrate that antitrust cases against Chinese companies for price fixing are not just China bashing, the following are additional examples of the major movement by the Justice Department and private plaintiffs in the United States to go after cartels, price fixing by foreign companies, aimed at the US market.  Well known antitrust experts have told me that Justice is targeting foreign cartels, especially Asian cartels, and is systematically going through industry after industry looking for evidence of price fixing.

In light of the ongoing cases against Vitamin C, Magnesium and Bauxite from China, it is just a matter of time before the Justice Department and Private Plaintiffs start to target Chinese companies for price fixing on various products.  One of the first targets of such price fixing investigations may be auto parts.

NINE JAPANESE AUTO PARTS COMPANIES PLEAD GUILTY TO PRICE FIXING CARTEL

On September 26th, the Justice Department issued the attached announcement that Nine automobile parts manufacturers and two executives agreed to plead guilty to fixing prices on automobile parts sold to U.S. car manufacturers and installed in U.S. cars.  FULL DOJ NOTICE AUTO PARTS SEPT 26  NINE JAPANESE AUTO PARTS COMPANIES PLEAD GUILTY

 The nine Japanese Companies agreed to pay a total of more than $740 million in Criminal fines.  The September 26th announcement states as follows:

“Nine Japan-based companies and two executives have agreed to plead guilty and to pay a total of more than $740 million in criminal fines for their roles in separate conspiracies to fix the prices of more than 30 different products sold to U.S. car manufacturers and installed in cars sold in the United States and elsewhere . . .  The department said that price-fixed automobile parts were sold to Chrysler, Ford and General Motors, as well as to the U.S. subsidiaries of Honda, Mazda, Mitsubishi, Nissan, Toyota and Fuji Heavy Industries–more commonly known by its brand name, Subaru.”

“These international price-fixing conspiracies affected more than $5 billion in automobile parts sold to U.S. car manufacturers, and more than 25 million cars purchased by American consumers were affected by the illegal conduct,” said Attorney General Eric Holder. “The Department of Justice will continue to crack down on cartel behavior that causes American consumers and businesses to pay higher prices for the products and services they rely upon in their everyday lives.”

“Some of the price-fixing conspiracies lasted for a decade or longer, and many car models were fitted with multiple parts that were fixed by the auto parts suppliers,” said Scott D. Hammond, Deputy Assistant Attorney General of the Antitrust Division’s criminal enforcement program. “The Antitrust Division has worked hand in hand with its international competition colleagues who have provided invaluable assistance to the Justice Department in breaking up these worldwide price-fixing cartels.”

“Today’s charges should send a message to companies who believe they don’t need to follow the rules,” said Ronald Hosko, Assistant Director of the FBI’s Criminal Division. “If you violate the laws of this country, the FBI will investigate and put a stop to the threat you pose to our commercial system. The integrity of our markets is a part of the foundation of a free society.”

“Including those announced today, 20 companies and 21 executives have been charged in the Antitrust Division’s ongoing investigation into price fixing and bid rigging in the auto parts industry. All 20 companies have either pleaded guilty or have agreed to plead guilty and have agreed to pay more than $1.6 billion in criminal fines. Seventeen of the 21 executives have been sentenced to serve time in U.S. prisons or have entered into plea agreements calling for significant prison sentences.”

“Each of the companies and executives charged today has agreed to cooperate with the department’s ongoing antitrust investigation. The plea agreements are subject to court approval. The companies’ and executives’ agreed-upon fines and sentences are:

• Hitachi Automotive Systems Ltd. to pay a $195 million criminal fine;

• Jtekt Corporation to pay a $103.27 million criminal fine;

• Mitsuba Corporation to pay a $135 million criminal fine;

• Mitsubishi Electric Corporation (MELCO) to pay a $190 million criminal fine;

• Mitsubishi Heavy Industries Ltd. to pay a $14.5 million criminal fine;

• NSK Ltd. to pay a $68.2 million criminal fine;

• T.RAD Co. Ltd. to pay a $13.75 criminal fine;

• Valeo Japan Co. Ltd. to pay a $13.6 million criminal fine;

• Yamashita Rubber Co. Ltd. to pay a $11 million criminal fine;

• Tetsuya Kunida, a Japanese citizen, to serve 12 months and one day in a U.S. prison, and to pay a $20,000 criminal fine; and

• Gary Walker, a U.S. citizen and former executive of a U.S. subsidiary of a Japan-based automotive products supplier to serve 14 months in a U.S. prison, and to pay a $20,000 criminal fine.”

 

At a news conference about the guilty plea, Scott D. Hammond, Assistant Attorney General of the Antitrust Division’s Criminal Enforcement Program, stated as follows in the attached statement:

“We have seen a pattern during the course of this investigation. The detection of one auto part conspiracy has led to the discovery of other conspiracies involving a new set of products, a new group of conspirators and a new list of victims. And as the Attorney General said, our work isn’t done. . . .”

“The companies and executives charged today will pay a heavy price for their conduct. As of today, more than $1.6 billion in criminal fines have been obtained thus far and 17 auto parts executives are currently serving prison time or are awaiting sentencing. The deterrent impact of their sentences should resonate in boardrooms around the world.”

“As today’s charges demonstrate, global cartels operating largely outside of our borders often constitute the biggest competitive threat to our economy, our businesses and our consumers. The Antitrust Division and the FBI have worked closely with our international competition colleagues to break up these worldwide price-fixing cartels.”

SCOTT HAMOND SPEECH

LIQUID CRYSTAL DISPLAY (LCDS) FROM TAIWAN

In San Francisco, a criminal antitrust trial is proceeding against Borlong Bai of AU Optronics in Taiwan for his involvement in a cartel to price liquid crystal displays.  AUO, its US subsidiary  and two executives were convicted of price fixing last year and two other executives were found not guilty.  Bai’s attorneys are arguing that although he was a manager of AUO’s division that sold LCDs to laptop computer companies, Bai simply used the information he received to outmaneuver his rivals and not to fix prices.

The Justice Department is arguing that Bai was essential to the global conspiracy to fix prices of LCDs.

ANTITRUST AG BILL BAER SPEECH ON CRIMINAL ANTITRUST CASES LCDS FROM TAIWAN

On September 25, 2013, Bill Baer, the Assistant Attorney General for the Antitrust Division at the Justice Department spoke to the Georgetown Law’s 7th Annual Global Antitrust Enforcement Symposium on the importance of the lesson from the LCDs case against Taiwan companies.  BAER DOJ STATEMENT  Mr. Baer stated in the attached speech:

“Criminal enforcement is a large part of what we do at the Division. Effective sanctions matter there too. Guided by the federal Sentencing Guidelines, our prosecutors seek criminal sentences that are consistent with statutory considerations and reflect the seriousness of the offense, promote respect for the law, provide just punishment, afford deterrence, protect the public, and offer defendants an opportunity for effective rehabilitation.”

“Last year, for the first time, the division recommended that a criminal antitrust defendant be required, as a condition of its probation, to retain an independent corporate monitor to develop and implement an effective antitrust compliance program. The defendant, AU Optronics Corporation (AUO), its U.S. subsidiary, and two of its top executives, had been convicted at trial for their role in a conspiracy to fix the price of liquid crystal display (LCD) panels – a conspiracy that had a significant impact on U.S. commerce.”

“Rarely has a company needed an effective antitrust compliance program as much as AUO. AUO was founded the very month the LCD conspiracy began. From its inception, AUO’s standard operating procedure was collusion. “Antitrust compliance program” was not in its lexicon. Even after conviction, AUO continued to employ convicted price-fixers and indicted fugitives. As a result, the division argued that there was no reason to believe that AUO’s conviction and the imposition of a criminal fine – even a large fine – would deter AUO from engaging in future collusive conduct.”

“The court agreed.  In addition to a $500 million fine, the court sentenced AUO and its subsidiary to three years of probation during which the companies are required to develop, adopt, and implement an effective compliance and ethics program, and to retain an independent monitor to oversee that program. Consistent with the division’s willingness to request external monitors in the civil context, the division will consider seeking conditions of criminal probation that include independent monitors when faced with circumstances in which the division is not persuaded that penalties alone will deter future illegal behavior.”

Attached are two class action complaints filed in October against Japanese auto parts.  As a result of the Justice Department plea agreements, Japanese auto parts companies and probably eventually Taiwan auto parts companies are exposed to $100s of millions, if not billions of dollars in liability under private right of action triple damage antitrust cases.  AUTO PARTS SWITCHES PANASONIC  DIAMOND AUTO PARTS AT CASE

US FTC CHAIRWOMAN STATES THAT CHINA NEEDS TO ENSURE PROCEDURAL FAIRNESS IN ITS ANTITRUST PROCEEDINGS

On September 25, 2013, at a conference in Washington DC, FTC Chairwoman Edith Ramirez questioned the Chinese Government’s fairness in antitrust proceedings.  Ms. Ramirez stated:

“While every country must determine its own competition policy, we believe consumers and competition policy are best served when competition enforcement is based solely on economic analysis of effects on competition.  But if other factors nonetheless enter into competition decisions, their nature and effect should be transparent.”

The problem with Ms. Ramirez’s statement is that the Chinese government’s first experience with US government fairness is through the US antidumping laws.  For decades, the Chinese companies and government have been subjected to Commerce Department antidumping and countervailing duty proceedings, which are clearly not fair and transparent.  With its surrogate country and surrogate value analysis, Commerce Department determinations in antidumping cases on their face are arbitrary and capricious.  Using Bulgaria as a surrogate country in the Hardwood Plywood case is just such an example.

The procedural unfairness inherent in US antidumping and countervailing duty laws affects the entire legal relationship between the US and China.  Chinese government officials and many Chinese companies sincerely believe that the United States is simply out to bash Chinese companies and procedural fairness be damned.

What is sauce for the goose is sauce for the gander.  If the Commerce Department uses inherently unfair procedures in its antidumping and countervailing duty investigations, which have no basis in economic reality, from the Chinese government’s point of view why should it base its competition policy on “economic analysis of effects of competition.”

CLASS ACTION ANTITRUST CASE AGAINST KOREAN NOODLE COMPANIES

On September 5, 2013, the attached class action antitrust case complaint was filed in Federal District Court in California by Stephen Fenerjian against Korean noodle companies for price fixing on exports of noodles to the United States.  The target companies are: Nong Shim Company Ltd., Nong Shim America Inc., Ottogi Company Ltd., Ottogi America, Inc., Samyang Foods Company Ltd., Samyang (USA) Inc., Korea Yakult Co., Ltd., and Paldo Company Ltd.  KOREAN NOODLES ANTITRUST CASE

SECURITIES

SEC GRANTS DELAY IN PROCEEDING AGAINST US ACCOUNTING FIRMS FOR REFUSING TO RELEASE AUDIT DOCUMENTS OF CHINESE COMPANIES

On October 2, 2013, in the attached order, SEC ORDER ACCOUNTING FIRMS the U.S. Securities and Exchange Commission (“SEC”) granted a request from an administrative law judge to give an additional 100 days to determine whether top accounting firms, such as Ernst & Young, Deloitte and Price, Waterhouse, have to produce audit document of Chinese company clients that are suspected of defrauding their US investors through reverse mergers.  In December 2012 the SEC started this case because it believes the accounting firms, including the Big 4, have refused to to cooperate with document requests in an investigation into China-based companies whose securities are publicly traded in the U.S. in violation of US security laws.  The accounting firms argue that they fear violating Chinese secrecy laws.  As evidenced by the complaints on this site, the SEC has cracked down in the last few years on fraudulent reverse mergers, in which Chinese companies have used existing public shell company to merge with a private operating company, leaving the shell company as the surviving legal entity.  The crackdown, however, has been delayed by the Chinese privacy laws, which bar China-based auditors, including the subsidiaries of US accounting firms, from turning over Chinese client information.

The accounting firms have been fighting requests for audit paperwork related to Chinese companies accused of fraud on US investors.  In July, following bilateral investment talks, the U.S. announced that China had agreed to turn over certain audit documents to the SEC and the Public Company Accounting Oversight Board.  That deal came shortly after the PCAOB announced a memorandum of understanding with the China Securities Regulatory Commission and the country’s Ministry of Finance to ease restrictions on release of audit information in fraud investigations.

COMPLAINTS

A number of new securities complaints cases have been filed against Chinese companies.

On September 26, 2013, the Securities and Exchange Commission (“SEC”) filed the attached  securities fraud complaint against Lee Chi Ling (“Lee”) and Perfect Genius Limited (“Perfect Genius”), alleging securities fraud in a classic “pump and dump”scheme from at least June 2004 through at least February 2006 to manipulate the price of the common stock of China Energy Savings Technology, Inc.   PERFECT GENIUS

On September 26, 2013, the SEC filed a securities fraud complaint against defendants Chan Tze Ngon, a/k/a Chen Zi Ang and Ron Chan, (“Chan”), and Jiang Xiangyuan (“Jiang”).  The case involves two securities fraud schemes engineered by former high level officials of ChinaCast Education Corporation (“ChinaCast”) to steal about $100 million out of the company by diverting monety to their private accounts.  CHINA CAST

On September 27, 2013, the SEC filed a securities fraud complaint against Universal Travel Group (UTG), a China-based travel company, UTG’s former ChiefExecutive Officer Jiangping Jiang (“Jiang”); and UTG’s former Chief Financial Officer, Jing Xie (“Xie”) for diverting $41 million in public and private stock offerings in the United States to numerous unknown parties in Hong Kong and the PRC. In an interesting note, the attached complaint also includes consent judgements by UTG, Jian and Xie in which they agree to the SEC charges and agree to pay fines and penalties.  Even in China, you can run, but not hide.  UNIVARSAL TRAVEL

On September 30, 2013, Another class action securities case was filed against Light in the Box Holding, a Beijing company, and two Chinese individuals for securities fraud.  LIGHT IN THE BOX

 If you have any questions about these cases or about the US trade, customs, patent, antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–TRADE, PATENTS, SECURITIES, ANTITRUST

Jackson Statue Lafayette Park Monument White House After Snow WaDear Friends,

Over the last week, there have been major developments in the Trade, Patents, Securities and Antitrust areas.  The beat of the US China Trade War goes on.

 

TRADE

SOLAR CELLS

Commerce has referred a number of Chinese exporters and US importers to Customs for evasion of the Antidumping and Countervailing Duty Orders through the Third Country Solar Cells issue.  See attached document.  PUBLIC VERSION Solar Cells Referral to CBP  In fact, we are working with one importer now because Customs is requiring the importer to prove that all the solar cells in the Chinese panels and modules are foreign solar cells and have not been commingled with Chinese solar cells.

STEEL SINKS

Unfortunately, the ITC reached an affirmative injury determination in the Steel Sinks case, ignoring the “but for” standard, the higher causation standard set in the Wood Flooring appeal.  The major reason for the loss in this case, however, was the failure of US importers and Chinese producers/exporters to participate in the case.  They gave up too soon.  Attached are the antidumping and countervailing duty orders that were issued in the case.  SINKS AD ORDER FED REG   SINKS CVD ORDER FED REG

COMMERCE DEPARTMENT RULE CHANGE

Attached is a revision to the Commerce Department’s antidumping and countervailing duty regulations regarding the submission of factual information, including surrogate value information, on the record at the Commerce Department, which was published April 10, 2013 in the Federal Register.  COMMERCE RULES CHANGE ON SURROGATE VALUES  The most important change apparently is the decision of the Commerce to eliminate the opportunity to submit surrogate values after the preliminary determination.

This is a real blow to US importers and Chinese producers/exporters because often the Chinese respondents have no idea what critical value Commerce will use until they see the Commerce Department’s preliminary determination.  If, for example, Commerce uses an aberrational surrogate value for a specific raw material input in the preliminary determination, the US importer or the Chinese company had the opportunity to get a more reasonable value and put it on the record.  No longer.

By the way, Commerce’s argument that Petitioners or respondents could not comment on the submission of the surrogate values after the preliminary determination is bogus.  Generally, Commerce takes another 6 months after the preliminary determination to issue its final determination and during that period both Petitioners and Respondents submit case and rebuttal briefs and attend a hearing at Commerce.

Now the chance to counter an aberrational surrogate value has been eliminated making it even more difficult for US importers and Chinese producers/exporters to get a fair determination at the Commerce Department.

CUSTOMS FRAUD

HONEYGATE– HONEY TRANSSHIPMENT

Attached is an article about the Customs fraud investigations in the transshipment of Chinese honey around US antidumping orders.  Honeygatel  The author is Michael Coursey, at the Kelley, Drye law firm.  Mike and I used to work at the Commerce Department together. Mike represents the US producers in the Honey, Mushrooms and Garlic from China antidumping cases so understand that he is looking at antidumping cases from a domestic producer’s point of view.

The point of the article, however, is that US producers are pushing for Customs investigations against transshipment around antidumping orders, and Customs is taking these investigations very seriously. As Mike states in the attached article as just one example of the Customs investigations listed in the Article:

“ICE’s undercover investigation also led to it to uncover another major player in Honeygate: Jun Yang, a wealthy Chinese businessman and purported pillar of the Houston, Texas community who served on advisory boards to the Mayor of Houston and hobnobbed with the rich and famous. Yang is believed to be involved in efforts to avoid dumping duties through the “new shipper” administrative review process at the Commerce Department. Specifically, Yang made millions as owner of honey and seafood importer National Commodity Corp. by brokering sales to Honey Solutions and others of honey that was adulterated or mislabeled as being from India and Malaysia when it really came from China. Yang has agreed to the prosecutors’ recommendation for a 74-month prison sentence, imposition of a $250,000 fine and restitution of $2.64 million. The judge has not yet ruled on the plea agreement. . . .”

“In addition to Honeygate, there is an increasing trend of the U.S. Department of Justice (DOJ) and private citizens fighting customs fraud under the False Claims Act, which allows private citizens to sue on behalf of the United States and share in any recovery if they provide the government with the necessary information and evidence. The first phase of Honeygate marked the DOJ’s first use of Sarbanes-Oxley’s criminal obstruction of justice statute, which includes a 20-year incarceration penalty per offense, in the Alfred L. Wolff prosecutions.

This trend has continued in other customs fraud prosecutions of importers that falsify entry documents and cover-up such fraud in order to avoid paying millions in customs duties.  Much of this area is still evolving, with at least four U.S. federal circuit courts currently split as to whether certain customs fraud and smuggling laws are just civil or also criminal in nature.”

In talking to Mike, he also told me that he is behind the effort to go after the US insurance companies that posted new shipper bonds for Chinese producers/exporters.  Mike estimated that the liability for one US insurance company is close to $200 million.

Attached is also another article about the Honeygate Customs fraud cases.  CANADIAN FOOD WHOLESALER HONEY GATE

PATENTS

HAIER

Attached is a patent complaint that was filed on April 8, 2013 by Guardian Media Technologies against Haier, Desay, Lasonic, Digway, Veehom, Denca and Express Way Ltd. for infringement of certain patents for TVs and DVD players.  HAIER CASE

HUAWEI

Another patent complaint was filed on April 11, 2013 against Huawei by Media Digital.  HUAWEI PATENT MEDIA DIGITAL

337 CASES

A new section 337 case was filed on April 3rd against China on Linear Actuators.  If anyone wants a copy of the complaint, please feel free to contact me.  The notice is below:

Pending Institution

Docket No: 2949

Document Type: 337 Complaint

Filed By: Gorman & Williams

Behalf Of: Okin America Inc. and Dewert Okin GmbH

Date Received: April 3, 2013

Commodity: Linear Actuators

Description: Letter to Lisa R. Barton, Acting Secretary, USITC; requesting

that the Commission conduct an investigation under section 337 of the

Tariff Act of 1930, as amended regarding Certain Linear Actuators. The

proposed respondents are Changzhou Kaidi Electrical Co. Ltd., China and

Kaidi LLC, Easton Rapids, MI.

SECURITIES

FARRIS ARTICLE—DELAWARE COURT DECISION ON ZST DIGITAL NETWORKS

On April 9, 2013, Ted Farris, an international capital markets partner in our New York office, authored an article about Deutsch v. ZST Digital Networks, Inc. (Del. Ch. C.P.A. No. 8014-VCL, March 28, 2013), in which the Delaware Chancery Court authorized seizure of a Chinese company’s assets and a court ordered shareholder buy-out in what should have been a simple books and records case. See attached order.  ZST ACTUAL ORDER  Ted Farris specializes in assisting Chinese companies, acquirers and special committees in considering an exit from U.S. regulatory and reporting requirements in going dark and going private transactions, including delistings from US stock exchanges.  As Ted states in the Article:

 

“Delaware Court Authorizes Seizure of Chinese Company’s Assets in Books and Records Case

China-based companies incorporated and publicly traded in the United States have received another harsh blow from the Delaware Court of Chancery, which appears to be losing patience with failure of Chinese companies to comply with Delaware corporate-law requirements. In Deutsch v. ZST Digital Networks, Inc. (Del. Ch. C.P.A. No. 8014-VCL, March 28, 2013), China-based ZST Digital failed to comply with a December 2012 default judgment ordering it to produce corporate books and records to a U.S. shareholder in Delaware pursuant to Section 220 of the Delaware General Corporation Law. On the shareholder’s motion, Vice Chancellor J. Travis Laster held the company in contempt of court, granted the U.S. shareholder the right to put his shares back to the company at a price based on book value derived from its last SEC financial report, and appointed a receiver for the Chinese company’s assets to enforce the court orders, including payment of the put price. Although, as a practical matter, it may be extremely difficult for the receiver to reach the company’s assets which are all in China, the case unveils a potentially powerful new weapon to enforce U.S. corporate-law standards on Chinese companies that are incorporated in the United States and have shares traded in U.S. markets. The ruling may further encourage China-based companies to consider exiting U.S. securities markets.

Stonewalling a Books and Records Request

ZST Digital is a China-based company that was incorporated in Delaware in 2006. Its business operations are entirely in China where it is engaged in supplying digital and optical equipment to cable equipment operators, including internet-enabled set top boxes, primarily in Henan Province. ZST Digital’s common shares became publicly traded through a 2009 share exchange that was accounted for as a reverse merger. The company filed reports with the Securities and Exchange Commission until August 2012, when it “went dark” by filing a Form 15 with the SEC to terminate its reporting obligations under the Securities Exchange Act of 1934. However, its shares continued to trade in the over-the-counter market. The company’s last SEC filing, its Form 10-Q for the quarter ended September 30, 2011, claimed total revenue exceeding $125 million for the nine months ended September 30, 2011. After that filing, ZST Digital ceased filing financial reports with the SEC. In addition, BDO, the company’s auditor resigned in March 2012, and the company claimed it was therefore unable to provide audited financial statements (although it subsequently hired a new auditor). The company’s share price declined from a high of approximately $11.00 in January 2010 to $1.30 per share in April 2013. The stock’s current 52-week range as of April 5, 2013 was from $6.76 to $0.31 per share.

Peter Deutsch, a ZST Digital shareholder who claimed to own more than 3.9 million shares, brought an action in the Delaware Court of Chancery after ZST Digital “went dark” seeking access to the company’s books and records under DGCL Section 220.  Prior to the lawsuit, the company’s counsel at Pillsbury Madison & Sutro LLP had responded by letter offering access to the books and records at the company’s principal office in China, a common response by China-based companies to such a request. Deutsch was not willing to travel to China to see the documents and filed suit demanding that they be produced in Delaware or New York. ZST Digital ultimately failed to respond, and a default judgment was entered on the Section 220 claim in December 2012.

The default judgment ordered ZST Digital to produce books and records in the State of Delaware that included extensive financial disclosures and company strategic plans, including any plans to “go private.” The court rejected the company’s request that Deutsch travel to China to inspect the information. When ZST Digital failed to comply with the terms of the initial order, Deutsch filed a motion against the company for contempt of court, for grant of a put right at the fair value of his shares and for appointment of a receiver. Vice Chancellor Laster granted the plaintiff’s motion for contempt and also granted Deutsch the extraordinary and unprecedented right to put his shares of ZST Digital back to the company at their supposed book value of $8.21 per share (at a time when the shares were trading for only approximately $1.39 per share).

The value of the court-ordered buy back exceeded $30 million and was based on the Company’s book value derived from the balance sheet included in its last-filed Form 10-Q report for the quarter ended September 30, 2011. The court further ordered the appointment of a receiver for the company’s assets for the purpose of enforcing the court’s orders, including the put right, and ordered ZST Digital to pay all costs and expenses of the action, the receivership and enforcement of the court’s orders. ZST Digital has so far failed to respond to the court’s orders.

In his court filings, Plaintiff Deutsch alleged that ZST Digital and other Chinese companies have “gone dark” and ceased filing reports with the SEC in order to lower their stock prices and make a “going private” transaction less expensive. The court-ordered buy-out option requested by Plaintiff Deutsch was based on court-ordered buy-outs in the context of closely held corporations. Plaintiff conceded the unprecedented nature of the “put” remedy in the public company context. The court’s order will effectively prevent ZST Digital from undertaking a “going private” transaction as many other Chinese companies have done over the last several years. (More than 100 Chinese companies have “gone dark” or “gone private” since January 1, 2008.)  Any effort to cash out U.S. shareholders now would undoubtedly face substantial court obstacles given Deutsch’s put right and the receivership order. What impact this will have on the company’s U.S. shareholders remains to be seen.

As ZST Digital has simply failed to respond to the lawsuit, Deutsch’s extraordinary legal victory may have little practical impact so long as the company stays out of the United States and does not attempt a transaction with its U.S. shareholders. ZST Digital has no U.S. assets for the receiver to seize and has so far shown no inclination to pay the put price required by the court’s order. Nevertheless, the case shows that the Delaware courts are willing to use every conceivable remedy against a Chinese company that they perceive as having flouted court orders and ignored the corporate-law rights of U.S. shareholders. The decision leaves both ZST Digital and its shareholders in limbo.

Conclusion

Chinese companies have often attempted to stonewall U.S. shareholders of their Delaware-incorporated entities under DGCL Section 220 by insisting that U.S. shareholders travel to China to inspect books and records. Vice Chancellor Laster made clear that shareholders can insist on such production in the State of Delaware. Further, the list of documents ordered to be produced under DGCL Section 220 was extremely broad and included detailed financial and strategic information even though ZST Digital was no longer required, as a matter of U.S. securities law, to file any reports or disclose information under SEC reporting requirements. In the absence of a confidentiality agreement with a shareholder, this kind of material, nonpublic information could not, as a practical matter, be disclosed to one shareholder (who might freely trade on it) without making that information available to all shareholders through a public announcement.

If Delaware courts can really require public disclosure of financial information by non-reporting companies pursuant to a shareholder demand under DGCL Section 220, this section could in theory be used to defeat a company’s purpose in “going dark” by deregistering under the Exchange Act. Nevertheless, the extreme remedies of granting a put right (in effect a court ordered buy out), appointing a receiver and effectively requiring public disclosure of financial and strategic information by a publicly traded company may reflect the unusual facts of the case. There is no question that ZST Digital’s refusal to participate in the case and its repeated defaults in responding to court orders motivated Vice Chancellor Laster in shaping these extraordinary remedies. If ZST Digital had instead made an appearance, contested the matter and offered some compromise proposal on the information requested, it could almost certainly have obtained a better result for the company that would not have limited its future flexibility in dealing with U.S. shareholders.

Still, the ZST Digital case means that Chinese companies would be well advised to pay more attention to U.S. legal risks given the Delaware courts’ increasingly tough stances in these areas. It is no longer sufficient for U.S.-incorporated Chinese companies to “go dark” and then ignore compliance with basic requirements of U.S. corporate law. The Delaware courts are not likely to give such companies the benefit of the doubt any longer (if they ever did), and other states regularly follow Delaware’s lead in matters of corporate law.

China-based companies with shares trading in U.S. public markets should carefully consider the implications of the ZST Digital case as part of their determination of whether to remain trading in the United States or to consider an exit through a “going private” transaction.”

 

Attached also an article from “Theasset.com” quoting Mr. Farris on this issue.  FARRIS QUOTE

LONGTOP—DELOITTE

On April 8, 2013, a New York Federal District Court Judge tossed Deloitte out of a class action securities lawsuit against Longtop Financial Technologies for lying to investors and exaggerating the size of its profit margins.  In the attached opinion, the Judge determined that the Plaintiff had failed to sufficiently allege that Deloitte violated federal securities laws in signing off on Longtop accounts between June 2009-May 2011. LONGTOP SECURITIES DECISION TOSSING DELOITTE

CITIC AND PUDA COAL

ON April 8, 2013, a class action securities case was brought in the Federal Court in the Southern District of New York against Puda Coal Inc. and CITIC Trust Co., Ltd.  Attached is a copy of the complaint.  PUDA COAL CITIC

The complaint alleges that CITIC is “the largest Chinese private equity fund and merchant bank, which, by means of a transfer of 49% ownership interest and a 51 % pledge as security for a loan, now controls Puda’s sole operating subsidiary and its only source of revenues.”

The complaint further alleges that “this action arises from a fraudulent scheme in which Puda insiders improperly transferred the Company’s only revenue-producing, operating subsidiary to CITIC and then, with the assistance of CITIC, falsely portrayed to investors in Puda that the Company still possessed its operating subsidiary.”

ANTITRUST

VITAMIN C

The Vitamin C case goes on to the next phase.  The first attack is the motion by Plaintiffs to obtain their legal fees from the Chinese defendants.  The legal fees for Plaintiffs could well be in the millions.  See the attached document asking for an extension to file the motion.  VITAMIN C MOTION TO PAY PLAINTIFF’S LEGAL FEES  The Court granted the extension.

This was followed by an April 11, 2013 Renewed Motion by Hebei Welcome and North China Pharmaceutical Group Corp. that the case be dismissed as a matter of law based on state and foreign sovereign compulsion and international comity.  See attached document.  SHORT HEBEI MOTION JUDGMENT  In the motion, the Chinese defendants go into detail as to MOFCOM regulations issued in the late 1990s purportedly giving the Chamber the authority to set up a group to set prices.  The Court has yet to rule on the Renewed Motion.

On April 12, 2013, Plaintiffs filed the attached injunction motion to enjoin the Chinese defendants from operating the cartel and setting the export prices for Vitamin C.  INJUNCTION MOTION  In the Fact Section of the attached motion, Plaintiffs state:

“Evidence admitted at trial established that after Plaintiffs filed their complaint in January 2005, Defendants continued meeting, exchanging information, and reaching agreements with one another. In November 2005, Wang Qiang of Aland wrote that the defendants “should not have any worry” about the lawsuit whether they won or lost, but that they should “do many things in a more hidden and smart way”:

“This act of deciding production or prices based on coordination is a kind of monopoly whatever the reasons. However, I believe we should not have any worry since the Ministry of Commerce is a friend of the court in the lawsuit. If we won the lawsuit, it would be hard for foreigners to make more trouble. Even if we lost the case, government would take the foremost part of responsibility. After all, we need to do many things in a more hidden and smart way.”

. .  . . (“The recent antitrust lawsuit is unprecedented, but we shall not suspend the coordination mechanism of the VC industry in our country”); (noting that “the antitrust investigation was time-consuming” and that “[e]verybody must pay special attention to relevant matters on confidentiality”).

Wang Qi also testified that after the lawsuit was filed, the defendants discussed the need to keep meetings confidential and to be more careful about what was written down.  . . . And Qiao Haili testified that, as a result of the lawsuit, any notes taken by meeting participants “would be torn apart.” . . . .

Eventually, with trial approaching, the meetings to discuss price subsided. At trial, Wang Qi of Aland testified that in the time since his 2008 deposition, his company had stopped meeting with competitors to discuss prices.  . . . He also testified that he would know if such communications were taking place. . . .”

DOJ ANNUAL ANTITRUST REPORT 2013

On April 11, 2013, the Justice Department issued its annual 2013 antitrust report.  In the report, there are two sections of interest to Chinese companies and US importers because it demonstrates how the Justice Department is going after foreign companies for price fixing of export prices using a cartel in the export of products to the United States.  The point is that antitrust cases against foreign cartels are not just aimed at China.

The Criminal Division of the report states as follows:

Liquid Crystal Display Panels

On March 13, 2012, following an eight-week trial, a jury in the Northern District of California returned guilty verdicts against AU Optronics (AUO), a Taiwan manufacturer of liquid crystal display panels, its American subsidiary, AU Optronics America, and the former president and former vice president of AUO for their participation in a conspiracy to fix the price of thin film transistor liquid crystal display panels (TFT-LCD panels).

The jury was unable to return a unanimous verdict as to one of the subordinates charged. It returned not guilty verdicts against two other subordinates.

The guilty verdicts were notable in that the jury determined that the Division had proven beyond a reasonable doubt that the gain derived from the conspirators for sales into the U.S. was at least $500 million. This was the first time that a jury convicted a corporate defendant under the antitrust laws and applied the “twice the pecuniary gain or loss” alternative fine provision of 18 U.S.C. § 3571(d).

On September 20, 2012, AUO was sentenced to pay a $500 million fine and the convicted executives were each sentenced to serve three years in prison. The $500 million fine matches the largest fine ever imposed against a company for violating the U.S. antitrust laws.

The Division successfully retried the third AUO executive, who was found guilty after a three-week trial, on December 18, 2012. Including these trial convictions, the Division’s LCD investigation thus far has resulted in convictions of ten companies and criminal fines totaling $1.39 billion, as well as convictions of 13 executives, and charges against seven additional individuals (one awaiting trial and six who remain fugitives). . .  .

Ongoing Investigations Continue to Produce Results

Auto Parts

The Division is dedicating significant resources to the ongoing automobile parts investigation. To date, this investigation has yielded charges against nine companies and 12 individuals and more than $809 million in criminal fines for participation in conspiracies to fix prices of and rig bids on automobile parts, including safety systems such as seatbelts, airbags, steering wheels, and antilock brake systems, and critical parts such as instrument panel clusters and wire harnesses. Two of the executives charged are Japanese citizens. Each was sentenced in 2012 to serve two years in prison, the longest sentences imposed on foreign nationals voluntarily submitting to U.S. jurisdiction for an antitrust violation. During FY 2012, this investigation also yielded the third-largest criminal antitrust fine ever imposed—a $470 million fine against Yazaki Corporation. The Division continues to cooperate with its counterparts in Japan, Korea, the EC, and Canada, among others, on this investigation.

To date, the following corporate fines have been obtained:

• U.S. v. Yazaki Corporation, $470 million—the third largest criminal fine ever for an antitrust violation

• U.S. v. Furukawa Electric Company Ltd., $200 million

• U.S. v. DENSO Corporation, $78 million

• U.S. v. Fujikura Ltd., $20 million

• U.S. v. Tokai Rika Co., Ltd., $17.7 million

• U.S. v. Autoliv, Inc., $14.5 million

• U.S. v. TRW Deutschland Holding GMBH, $5.7 million

• U.S. v. G.S. Electech, Inc., $2.7 million

• U.S. v. Nippon Seiki Co., Ltd., $1 million

GENERAL LITIGATION PROBLEMS AGAINST CHINESE COMPANIES

In the attached decision, United States v. Pangang Group Company Ltd. and a group of affiliated Pangang companies, a federal judge in California threw out summonses that the Justice Department issued against titanium and steel producer, Pangang Group Co., and related entities in a criminal suit alleging the Chinese state-owned companies stole trade secrets from DuPont Co. by finding that the U.S. government failed to properly serve the defendants.  PANGANG ORDER

Pangang was allegedly aided by former DuPont employee Tze Chao and others in the U.S. who wanted to sell titanium dioxide trade secrets. These include chemical technology company USA Performance Technology and one of its co-owners Walter Liew and his wife Christina.  The Liews were arrested in July 2011 and indicted in August 2011 on charges that they tampered with witnesses, made false statements and attempted to delay the FBI’s effort to uncover the illegal sale of DuPont’s trade secrets to rival manufacturers, including Pangang.

Chao pled guilty in March 2012 to leaking confidential information from documents he reportedly retained after retiring in 2002.  The Liews pled not guilty in April 2012 to charges over their alleged role in the scheme. In February, a magistrate judge ordered Walter Liew to be freed on $2 million bail after 19 months in custody.

If you have any questions about these cases or about these laws in general, please feel free to contact me.

Best regards,

Bill Perry

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