Intelectual Property (IP)

Congress and the President Act to Protect America’s Intellectual Property – New Law Gives Broad Discretion to Sanction Foreign Individuals and Entities for Trade Secrets Theft That Could Harm National Security | Davis Wright Tremaine LLP

[co-author: Edlira Kuka]*

On January 5, 2023, the President signed into law the Protecting American Intellectual Property Act of 2022 (“PAIP” or “Act”), which requires the President to impose a range of sanctions on any foreign person[1] that the President identifies in required periodic reports to Congress as having knowingly engaged in or benefited from significant theft of trade secrets of U.S. persons if the theft (i) “is reasonably likely to result in, or has materially contributed to, a significant threat to the national security, foreign policy, or economic health or financial stability of the United States;” or (ii) “has provided significant financial, material, or technological support for, or goods or services in support of, … such theft.”[2] The President is also authorized to identify entities that are owned or controlled by, or act on behalf of, directly or indirectly, foreign persons engaged in prohibited trade secret theft activities.[3]

PAIP builds on a foundation of other laws[4] aimed at protecting U.S. intellectual property and sends a strong message that the United States intends to step up enforcement in this area. Although China, Russia, Iran and other adversaries are not mentioned in the text of the Act, it is clear from both PAIP’s sponsors’ remarks and recent U.S. enforcement actions that they and their agents and representatives are primary targets.

Broad and Unrestricted Discretion

The Act provides the President with broad discretion regarding the persons who will be designated in reports to Congress and thereby subjected to sanctions. Persons can be listed in the absence of any criminal or civil charges, judicial determination, or even evidence that a theft of trade secrets has occurred. The vagueness, indeed absence, of standards for designation stands in contrast to the more articulated approach of CAATSA and CISADA. Further, the Act fails to define core terms and concepts, such as what constitutes “significant financial, material, or technological support;” what trade secrets may “materially contribute” to a threat or are “significant;” or specific sectors whose protection is particularly important to the “national security, foreign policy or economic health or financial stability” of the U.S.

The absence of any requirement for a judicial or administrative determination as a pre-condition to the imposition of sanctions may invite judicial challenge and certainly dares foreign adversaries to impose parallel sanctions that may ensnare unwitting U.S. persons.

Sanctions Applicable to Entities

The Act provides that the President shall impose five or more of the following sanctions on any foreign entity[5] that has been included in the most recent report to Congress:

  1. Block and prohibit all transactions in property and interests in property of the entity that are in the United States, come within the United States, or are or come within the possession or control of a United States person;
  2. Include the entity on the Entity List maintained by the Bureau of Industry and Security of the Department of Commerce;[6]
  3. Direct the Export-Import Bank of the United States to not approve the issuance of any guarantee, insurance or extension of credit in connection with the export of goods or services to the entity;
  4. Prohibit U.S. financial institutions from making loans or providing credits to the entity totaling more than $10 million in any 12-month period;[7]
  5. Direct each U.S. executive director to an international financial institution to vote against any loan from the financial institution that would benefit the entity;
  6. If the sanctioned entity is a financial institution: (i) prohibit the Boards of Governors of the Federal Reserve System and the Federal Reserve Bank of New York from designating or permitting the continuation of a prior designation of the entity as a primary dealer of U.S. Government debt instruments, and (ii) prohibit the entity from serving as a U.S Government agent or as a repository of U.S. Government funds;
  7. Prohibit the U.S. Government from procuring, or entering into a contract to procure, goods or services from the entity;
  8. Prohibit transactions in foreign exchange that are subject to U.S. jurisdiction and in which the entity has interest;
  9. Prohibit transfers of credit or payments by, through, or to a financial institution that involve an interest of the entity, to the extent that such transfers or payments are subject to U.S. jurisdiction and involve an interest of the entity;
  10. Prohibit U.S. persons from investing or purchasing significant amounts of equity or debt instruments of the entity;
  11. Direct the Secretary of State and Secretary of Homeland Security, respectively, to deny a visa to and exclude from the U.S. any foreign corporate officer or principal of or shareholder with a controlling interest in the entity;
  12. Impose any of these sanctions on the principal executive officers or individuals with similar functions and authorities as such officers of the entity.

Sanctions Applicable to Individuals

In the case of a foreign individual[8] identified in the President’s most recent report to Congress, the Act provides that the President shall apply all of the following sanctions:

  1. Block and prohibit all transactions in property and interests in property if they are in or come within the U.S. or are or come within the possession or control of a U.S. person;
  2. Block the person from entering the U.S.;
  3. Deny a visa or other documents to enter the U.S. and any other benefit from the Immigration and Nationality Act; and
  4. Revoke any current U.S. visa previously granted.

Waivers, Exceptions, and Penalties

The authority to impose sanctions does not extend to U.S. intelligence and law enforcement activities, admission of an alien to the U.S. where necessary to comply with international agreements, and importation of goods. Further, the President may waive any sanction on foreign persons if the President determines that a waiver is in the national interest of the U.S. and not more than 15 days after issuing a waiver notifies Congress of the waiver and the reasons for granting the waiver.

Violations of the Act are subject to the penalties set forth in subsections (b) and (c) of section 206 of the International Emergency Economic Powers Act (50 U.S.C. § 1705), which include civil penalties not to exceed the greater of $250,000.00 or twice the amount of the transaction violating the Act. Criminal penalties include up to 20 years’ imprisonment, fines of up to $1 million, or both.

Implications

PAIP marks another step in the U.S. Government’s effort to respond to increasing thefts of U.S. intellectual property by foreign adversaries and the risks that poses to strategic U.S. interests. While obviously concerned with protecting trade secrets crucial to critical areas such as semiconductors, AI, and advanced manufacturing, the breadth of the Act will allow wider application. Similarly, although principally aimed at key adversaries such as China, Russia, Iran, and North Korea, others, including persons from more benign nations, could be ensnared by PAIP. Although there is no prescribed method for obtaining relief from a designation by the President, foreign persons will want to be prepared to demonstrate that IP in their portfolios has been lawfully obtained or developed. With the President’s first report to Congress due by June 8, 2023, we will soon have a sense of just how aggressively PAIP will be applied.

DWT is available to answer questions and assist our clients as we monitor developments under and impacts of this legislation, including when the President’s first report is submitted to Congress.

* a third-year law student at Seattle University School of Law, is a Communications Law, Regulation & Policy Manager at DWT.

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