U.S. District Judge Jeffrey White, Northern District of California
U.S. District Judge Jeffrey White, Northern District of California ()

SAN FRANCISCO — An immigrant businessman. A powerful U.S. corporation. And the secret to making everyday products from paper to paint a bright, luminous white.

Those are the elements of a high-stakes trial beginning this week in San Francisco federal court, where combustible racial politics and the strained relations between the U.S. and China are inextricably linked to economic espionage charges levied against an East Bay engineer.

Walter Liew, a U.S. citizen of Chinese descent, is accused of stealing valuable manufacturing secrets from the industrial giant DuPont and selling them to entities controlled by the Chinese government. But Liew’s lawyers at Keker & Van Nest insist their client carried out nothing more than routine business deals in China­—a far cry from the spy narrative offered up by federal prosecutors.

It’s among the first economic espionage cases to go to trial. And with the U.S. government determined to crack down on what it sees as pervasive domestic spying by China, the politics of the prosecution have been somewhat fevered since the Justice Department announced the charges in a three-page press release.

Both sides have vowed to steer clear of incendiary comments about China. But Liew’s lawyers fear that jurors may report to court with subtle cultural biases. Given the amount of recent “China-bashing” in the media, even a remark about “the need to protect American businesses” could stir up prejudice, they wrote in a pretrial brief.

“It seems likely that the government will try to steer clear of inflammatory rhetoric,” wrote lead defense lawyer Stuart Gasner, a Keker & Van Nest partner. “But it is also likely that the prosecution and defense have different notions of what is inflammatory.”

E.I. du Pont de Nemours & Co. is a leading manufacturer of titanium dioxide, or TiO2, a commercially valuable white pigment. Prosecutors contend Liew conspired to steal the industrial giant’s proprietary production method for TiO2 and help China build rival factories in exchange for nearly $30 million.

Liew, who has been held without bond for more than two years, will face counts of economic espionage, trade secret theft, tax evasion, and witness and evidence tampering in a two-month trial in U.S. District Judge Jeffrey White’s courtroom. Liew will stand trial with his business associate Robert Maegerle, a former DuPont employee who has also been charged with trade secret theft and witness and evidence tampering. Maegerle is represented by Atlanta lawyer Jerome Froelich.

Liew’s wife, Christina, will face charges of economic espionage, trade secret theft, and witness and evidence tampering in a separate trial. Another former DuPont employee, Tze Chao, pleaded guilty shortly after he was arrested.

When the federal charges were announced in early 2012, a Justice Department official called the case part of an effort to combat industrial spying by China. “We are committed to holding accountable anyone who robs American businesses of their hard-earned research,” said Lisa Monaco, now Obama’s top adviser for homeland security.

But despite repeated attempts, federal prosecutors did not manage to lawfully serve Liew’s alleged coconspirators at the cluster of Chinese companies known as the Pangang Group, underscoring the practical challenges for the government in pursuing economic espionage cases.

To make their case against Liew, assistant U.S. attorneys Peter Axelrod and John Hemann will have to prove that DuPont’s processes were bona fide trade secrets. Although the technology dates back to the 1940s, federal prosecutors argue that DuPont continued to hone its process for manufacturing titanium dioxide and guarded it closely. Unable to come up with another viable method, China was forced to import titanium dioxide from the West as manufacturing boomed.

Prosecutors allege that Chinese officials enlisted Liew to help them develop the titanium dioxide on their own in 1991. Nearly two decades later, he won a contract to build a manufacturing plant in Chongqing that would have been one of the largest of its kind in the world, according to court papers. His plan was based on secrets pilfered from DuPont, prosecutors contend.

“Liew possessed no intellectual property of his own and his employees were not developing technology—they were copying it and performing mathematical equations to size stolen technology to the Chinese factories they were helping to build,” prosecutors wrote in court papers.

But Liew’s lawyers will tell jurors DuPont’s techniques—decades-old and detailed in public sources like patents—were already common knowledge in the industry. When Liew and Maegerle signed on to work with the Pangang Group, their aim was to help the companies build a factory using information in the public domain, argues the team at Keker, which includes associates Simona Agnolucci and Katherine Lovett.

Moreover, Liew’s defense lawyers contend the government cannot show that he sought to benefit a foreign government or “foreign instrumentality”—a requirement for economic espionage charges. The government has little insight into the Pangang companies’ corporate structure and has not demonstrated that they are steered by the Chinese government, Gasner wrote in court papers.

“Mr. Liew—who is not even a Chinese national—never intended through these contracts to benefit the [People's Republic of China] or its instrumentalities,” Gasner wrote. “The government cannot prove otherwise.”

Liew, 56, was born in Malaysia and immigrated to the United States in the 1980s. He earned a degree in electrical engineering from the University of Oklahoma. After moving to the Bay Area, Liew worked for technology companies, including Advanced Micro Devices and Hewlett-Packard Co., before launching a series of small consulting businesses. It was through his company USA Performance Technology Inc., headquartered in Oakland, that prosecutors allege Liew contracted with the Pangang Group to deliver DuPont’s secret method for manufacturing TiO2.

The evidence, prosecutors contend, was discovered in a safe deposit box that Liew and his wife tried frantically to conceal from federal agents.

Searching Liew’s Orinda home in July 2011, the Federal Bureau of Investigation turned up a set of keys, according to an affidavit submitted by a special agent. The agents asked Liew’s wife whether the keys were for safe deposit boxes. She turned to her husband.

“You don’t know, don’t know,” Liew told her in Mandarin, apparently not realizing that a Caucasian agent spoke the language as well.

Shortly after searching Liew’s home, FBI agents landed a warrant to access the safe deposit box, where they found $17 million worth of contracts between Liew’s company and Chinese entities, an invoice to the Pangang Group for work on a titanium dioxide project and several digital storage devices—one of which held a letter that is now at the heart of the government’s case.

Addressed to Pangang Group executives, the letter details a banquet thrown in Liew’s honor by the Chinese government in 1991.

“At that time Secretary General Luo Gan gave directives, so that I would better understand China and continue to make contributions to her,” the document states. “The following day, I was given a list of key task projects by the appropriate Chinese agency. Titanium white by chlorination was one of the more important projects.”

To federal prosecutors, the document—titled “TiO2 Letter Final Oct 11 2004″—leaves little doubt as to Liew’s intent to benefit the Chinese government.

But Liew’s lawyers say the letter is easily misinterpreted without the proper cultural context, and they have fought to keep it out. Chinese businessmen typically inflate their credentials and political connections to win new business, Gasner wrote in a motion to exclude drafts of the letter. In a 2012 declaration, Liew denied attending the banquet mentioned in the letter.

“The government knows the letter’s far-fetched tales are untrue,” Gasner wrote. White ruled that prosecutors may use the letter at trial, provided that they can authenticate it. Liew’s lawyers dispute whether the letter was ever sent and whether their client even wrote it. Only Pangang officials can settle those questions, they insist.

Pangang’s absence is a sore spot for the government, which went to great lengths to lawfully serve the four Chinese entities that comprise the group. In addition to mailing a summons to the corporations’ last known U.S. addresses, FBI agents traveled to a plastics conference in Louisville to corner a Chinese executive with ties to Pangang. But White ruled that those attempts did not satisfy the Federal Rules of Criminal Procedure, which hold that the government must serve organizational defendants by delivering a summons to a representative and sending a copy of the document to the group’s most recent domestic address.

Liew’s lawyers claim the unavailability of foreign witnesses has posed problems for their case too. The day Liew and his wife were arrested at their home, the government searched various Pangang employees in an Alameda hotel. Documents were seized, but all of the employees were allowed to return to China, Gasner wrote in a trial brief.

In lieu of alleged coconspirators on the stand, both sides will rely heavily on expert witnesses. The government plans to call Georgetown professor James Feinerman to testify about China’s efforts to entice people of Chinese descent to steal technology from the West. Liew’s lawyers argued Feinerman should not be permitted to testify that Chinese government policy encourages IP theft and that “an extraordinary number of Chinese in business and government are engaged in this practice.” White agreed.

The Keker lawyers also pointed out that portions of Feinerman’s expert report were lifted from Wikipedia. White wrote that he was “extremely troubled” by the expert’s reliance on the online encyclopedia but would allow him to testify.

To counter Feinerman’s testimony, the defense intends to call Donald Lewis, a specialist on Chinese business law who has taught at Stanford Law School. Lewis will also be tasked with convincing jurors that the letter found in Liew’s files is not proof of a conspiracy but cultural puffery. Ruling over objections from the government, White allowed Lewis to testify that the letter reflects traditions that permeate business in China.

Federal prosecutors complain that Liew is waffling about his roots as he tries to win a trial with a strong nationalist subtext.

“The defense cannot even decide whether Liew is Malaysian or Chinese,” Hemann wrote in court papers. “When attempting to distance him from the Chinese government, he is a ‘Malaysian-born Chinese American.’ When advocating Professor Lewis’s foray into 19th Century cultural anthropology, Liew is just Chinese.”

Contact the reporter at jlove@alm.com.