A federal judge in Virginia recently held that the United States Department of Justice’s attempts to serve Kolon Industries, Inc and five of its executives with criminal summons in a high profile criminal trade secrets action were ineffective, finding, among other things, that service on its U.S. subsidiary was not sufficient.

In the complaint, which was unsealed last October, the DOJ alleged Kolon engaged in a multi-year campaign to steal trade secrets from a competitor. Kolon allegedly poached its competitor’s employees over a seven year period, intending to use its competitor’s technology for its own research and development  projects. Additionally, Kolon allegedly retained five employees from its competitor for purposes of obtaining information about the company’s R & D, pricing, and designs. Kolon’s employees also allegedly attempted to obtain additional information regarding its competitor’s products from current employees.

In last week’s ruling Judge Robert E. Payne of the Eastern District of Virginia rejected “at least eight U.S. government efforts to serve Kolon,” citing the DOJ’s failure to serve the parent company, as well as inordinate delays in service.

According to Judge Payne, the government’s service on Kolon’s American subsidiary failed to meet legal service requirements. Generally, service on a subsidiary does not constitute process on the parent company. There are exceptions to this rule, including establishing that the subsidiary is acting as a “managing or general agent” for the parent. Here, however, Judge Payne found that the DOJ did not make a proper showing of this, since Kolon’s subsidiary, not Kolon itself, contracts with American and Canadian customers. Similarly, Judge Payne found that the DOJ failed to successfully allege Kolon’s subsidiary, KUSA, was merely an alter ego of Kolon. Here, the DOJ failed to show KUSA was merely a conduit for Kolon or that Kolon dominated KUSA. By contrast, KUSA functioned as a solvent organization with independently audited records and its own Board of Directors.

Furthermore, Judge Payne found the DOJ’s service of Kolon failed under the Mutual Legal Assistance treaty between the United States and South Korea, since the service did not occur until a couple of days following the appearance date.

Despite the failure of service, Judge Payne denied Kolon’s request to dismiss the indictment entirely, finding that the Department of Justice would probably be able to serve Kolon in the future under the Mutual Legal Assistance Treaty. The United States Attorney’s office has already indicated plans to serve Kolon pursuant to the court’s order. According to Judge Payne, a new proceeding could occur as soon as June 7th, so long as Kolon is served properly. 

We will continue to keep you apprised of future developments.