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United States v. Shi

United States District Court, District of Columbia

December 17, 2019

UNITED STATES OF AMERICA,
v.
SHAN SHI, Defendant.

          MEMORANDUM OPINION

          CHRISTOPHER R. COOPER UNITED STATES DISTRICT JUDGE

         Earlier this year, a jury convicted Defendant Shan Shi of conspiring to misappropriate trade secrets from Trelleborg Offshore U.S. (“Trelleborg”), a Houston-based manufacturer of composite foam products used in offshore drilling operations. Dr. Shi is now awaiting sentencing. Prior to the sentencing, the Court is required to calculate Dr. Shi's advisory Sentencing Guidelines range. To do so, it must first set the appropriate offense level. Because the offense involved theft, that in turn requires the Court to determine the financial loss associated with Dr. Shi's conduct. The parties dispute this loss amount. The defense puts it at zero, arguing that there is no evidence that Trelleborg suffered an actual loss or that Dr. Shi ever intended it to. The Government pegs the loss at some $3 million. While it concedes there is limited proof of actual loss, the Government argues principally that Dr. Shi's documented plans to take market share from Trelleborg and other competitors evidence his intent to cause a loss of that amount. The difference matters. A loss finding of zero would leave Dr. Shi at base offense level 6 and result in an advisory sentencing range of 0 to 6 months imprisonment (assuming no other enhancements apply and Dr. Shi has no prior criminal history); a loss finding of $3 million, by contrast, would add 16 offense levels and lead to a recommended sentencing range of 41 to 51 months under the same assumptions.

         The parties have briefed the dispute and presented oral arguments on November 12, 2019. For the reasons summarized below, the Court accepts the Government's “market share” approach to calculating the intended loss amount but estimates the amount at the lower figure of $1, 050, 000. The Court will use that figure in determining Dr. Shi's advisory Guidelines range.

         Section 2B1.1(a) of the Sentencing Guidelines establishes the base offense level for theft-related offenses, including theft of trade secrets. The loss table at U.S.S.G. § 2B1.1(b)(1), in turn, increases the base level depending on the amount of loss suffered by the victim of the theft. The Government bears the burden of producing facts that support the imposition of a sentencing enhancement by a preponderance of the evidence. See In re Sealed Case, 552 F.3d 841, 846 (D.C. Cir. 2009).

         “Loss” is defined as “the greater of actual loss or intended loss.” U.S.S.G. § 2B1.1, app. n.3(A). The Government here does not contend that Trelleborg suffered any actual financial loss, so the Court will only consider intended loss. “‘Intended loss' (I) means the pecuniary harm that the defendant purposely sought to inflict; and (II) includes intended pecuniary harm that would have been impossible or unlikely to occur (e.g., as in a government sting operation, or an insurance fraud in which the claim exceeded the insured value).” Id. app. n.3(A)(ii).

         In assessing the amount of loss, the “court need only make a reasonable estimate.” Id. The Guidelines permit a district court to estimate the loss amount based on “the available information . . . as appropriate and practicable under the circumstances, ” such as the “fair market value of the property unlawfully taken” or “[i]n the case of proprietary information (e.g., trade secrets), the cost of developing that information or the reduction in the value of that information that resulted from the offense, ” or “[m]ore general factors, such as the scope and duration of the offense and revenues generated by similar operations.” Id.

         The Court begins with the mens rea requirement. In 2015, the Sentencing Commission changed the definition of “intended loss” to mean “the pecuniary harm that the defendant purposely sought to inflict.” In making this amendment, the Commission adopted the interpretation of “intended loss” articulated in United States v. Manatau, 647 F.3d 1048 (10th Cir. 2011). U.S.S.C., Amendments to the Sentencing Guidelines (Apr. 30, 2015), at 24-25. There, the Tenth Circuit held that “‘[i]ntended loss' means the loss the defendant purposely sought to inflict” and therefore “does not mean a loss that the defendant merely knew would result from his scheme or a loss he might have possibly and potentially contemplated.” 647 F.3d at 1050 (emphasis in original). To illustrate the distinction between knowledge and intent, then-Judge Gorsuch explained that it is “the difference between a ‘farm boy [who] clears the ground for setting up a still, knowing that the venture is illicit' but just looking for a paying day's work, and someone who clears the ground in order to work a still.” Id. at 1051 (quoting Model Penal Code § 2.06 cmt. 6(c) at 316). Because “the district court declined to make any effort to determine whether [the defendant] intended (had the purpose) to cause the losses in question, ” the Tenth Circuit vacated the sentence and remanded for the district court to conduct the appropriate inquiry. Id. at 1056.

         The Tenth Circuit took pains, however, to explain that “[o]f course, ” in analyzing the defendant's mens rea the district court “is free . . . to make reasonable inferences about the defendant's mental state from the available facts.” Id. Manatau therefore made clear that its holding was consistent with United States v. McCoy, 508 F.3d 74 (1st Cir. 2007), which held that “‘intended loss' can be shown by looking to what loss was ‘expected' because under [First Circuit] precedent a person is presumed to have ‘intended the natural and probable consequences of his or her actions.'” Manatau, 647 F.3d at 1055 (quoting McCoy, 508 F.3d at 74, 79). The Tenth Circuit noted as hornbook law that “[w]hat [a defendant] does and what foreseeably results from his deeds have a bearing on what he may have had in his mind.” Id. (quoting LaFave, Substantive Criminal Law § 5.2(f) at 355-58).

         Applying the Guidelines' intended-loss definition here, the Court finds that the Government has carried its burden of proving that one of Dr. Shi's purposes in conspiring to misappropriate Trelleborg's trade secrets was to cause a financial loss to it and other manufacturers of deep-sea buoyancy products. The evidence of Dr. Shi's plans to pilfer Trelleborg's proprietary design data and testing procedures is more fully outlined in the Court's Memorandum Opinion denying his Motion for Judgment of Acquittal, also issued today. As relevant here, in 2014 Dr. Shi created a company, CBM International (“CBMI”), to produce “syntactic foam” and related products for the deep-sea drilling industry. He staffed the company with former Trelleborg employees who still had access to Trelleborg's proprietary manufacturing data. Those employees proceeded to acquire and use that data-specifically, data related to glass “macrospheres” contained in the foam-to help CBMI (and its Chinese parent company, CBMF) develop its syntactic-foam manufacturing capabilities. The jury found that Dr. Shi had conspired in the misappropriation.

         As CBMI was getting off the ground, it created a business plan explaining the market opportunity that it saw in deep-sea buoyancy products. The plan stated that the company's goal was to become “the fifth company in the world that can provide [a] wide range and qualified buoyancy products for [the] offshore oil & gas industry.” Gov. Ex. 176 at 30825. CBMI believed it could penetrate the existing market-which was confined to Trelleborg and three other international companies-by creating higher-quality products at lower prices. See Id. (explaining that “CBM[I] has the advanced chemical process and better engineering design [than the four existing companies] to make new generation of the buoyancy material for the industry”); id. at 30834 (noting that CBMI would “easily” be able to provide buyers with syntactic foam materials at a lower price). CBMI projected that by its fifth year of operations, it would generate an annual net profit of $3 million. Id. at 30826. Dr. Shi echoed the company's strategy in a July 2015 marketing proposal, explaining that CBMF's goal was to “break the monopoly” in the existing market and “replace” the deep-sea buoyancy products that were being imported into China. Gov. Ex. 4 at 35006-07.

         As the Government argues, it naturally follows from Dr. Shi's stated goal of taking sales from the existing competitors in the market that CBMI's gain would come at their expense. Because a factfinder may infer a defendant's intent from the natural and probable consequences of his actions, the Court concludes that Dr. Shi intended to harm his would-be competitors by taking sales and market share from them. Manatau, 647 F.3d at 1055; see Francis v. Franklin, 471 U.S. 307, 316 (1985) (holding that while it violates due process for a factfinder to be required to find mens rea based on the presumption that a person “is presumed to intend the natural and probable consequences of his acts, ” a factfinder is permitted to infer intent based on a defendant's actions).

         Resisting this conclusion, Dr. Shi argues that the Government must produce direct evidence (presumably in the form of a smoking-gun email or the like) indicating that Dr. Shi intended to cause harm to Trelleborg or, at least, evidence that CBMI specifically targeted Trelleborg customers. While such evidence would strengthen the government's case, it is not required for the Court to find, by a preponderance of the evidence, that Dr. Shi intended to cause pecuniary harm to Trelleborg. As discussed above, a court is permitted to make reasonable inferences based on the defendant's conduct in order to assess mens rea.

         Dr. Shi also argues that he lacked the intent to purposefully inflict pecuniary harm on Trelleborg because his goal was to grow the overall market for deep sea buoyancy products, which he suggests could have been accomplished without harming Trelleborg. Dr. Shi's argument is belied by the record, which, as discussed above, clearly shows that he set out to acquire market share by “replacing” sales to China by the existing companies and “breaking the[ir] monopoly”-not by seeking out new, unserved customers. Gov. Ex. 4 at 35006-07.

         In a similar vein, Dr. Shi argues that he lacked the requisite intent because he actually sought to partner with Trelleborg. As evidence of this supposed partnership, Dr. Shi points to discussions with Trelleborg that began in August 2015 about potentially selling macrospheres to Trelleborg. This argument fails for at least two reasons. First, that Trelleborg may have been interested at some point in buying macrospheres from CBMI does not negate Dr. Shi's stated intent to take sales away from the existing competitors in the buoyancy products markets generally. Moreover, the rest of the record evidence does not bear out Dr. Shi's contention that CBMI only sought to partner with Trelleborg. Indeed, after the discussions between the two companies began, CBMI continued to market products developed using Trelleborg's proprietary data. See Gov. Ex. 145 (emails from June 2016 showing CBMF's draft proposal for a ...


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