Our mission to help you navigate the new normal is fueled by subscribers. To enjoy unlimited access to our journalism, subscribe today.

The U.S. manufacturing plans of major South Korean electric vehicle battery maker SK Innovation (SKI) could be upended if the company is slapped with the harshest penalty possible in a trade theft case.

The decision, to be announced by the U.S. International Trade Commission (USITC) as soon as Monday, could in turn seriously disrupt the electric vehicle ambitions of Ford and Volkswagen, which have signed deals to use SKI’s batteries in upcoming cars. It could also jeopardize a $2.6 billion battery factory that SKI is building in Georgia, funded in part by huge tax rebates.

The commission ruled in March that SKI, whose customers for EV batteries also include Hyundai-Kia and Mercedes-Benz, had stolen trade secrets for years from competitor LG Chem. In a parallel lawsuit in Delaware federal court, LG alleged that SKI had hired 100 LG engineers and researchers who were then required to provide detailed information about LG’s production and engineering.

Poaching talent from competitors is common in the tech industry, but using hiring to steal technical details is illegal. SKI seems to have been aware of that distinction. It destroyed internal emails, later recovered, in which its employees discussed LG technology in detail. SKI’s evidence tampering led the USITC to issue what’s known as a default judgment in the case, effectively deciding in LG’s favor without a full trial.

The legal drama is part of LG and SKI’s broader battle for the EV battery market, which is expected to grow dramatically over the next decade. LG executives believe that SKI won contracts over LG Chem because, without comparable R&D expenses, it could sell its batteries more cheaply. One veteran of the Korean battery industry said in 2019 that the damage to whoever lost the legal battle could be “fatal.”

SKI’s contracts make the stakes of the USITC’s pending decision that much more critical. They include deals to provide batteries for planned EVs from Volkswagen and Ford, whose plans could be disrupted by a harsh penalty. SKI is also nearly finished building a battery factory in Commerce, GA. that was built using $300 million in tax incentives and land donated by the local government. Those incentives were driven by SKI’s promise to create thousands of new jobs in Georgia. But an adverse ruling from the ITC could prevent SKI from ever operating that plant as intended.

Those conditions have made the LG-SKI suit politically complex. Georgia legislators and SKI customers have advocated leniency, arguing that punishing SKI could damage partners who had no role in or knowledge of SKI’s violations.

Possible outcomes

The impact of its decision, however, may not matter much to the ITC, a federal body with the power to adjudicate trade disputes. While the risk of collateral damage would hold significant weight in the sentencing phase of a conventional criminal or civil court proceeding, experts say the ITC’s mandate and structure makes leniency less likely.

“The ITC, unlike courts, tends to award exclusion orders once it finds a violation,” says Mark Lemley, an intellectual property law specialist at Stanford University. “That’s the one thing they can do.”

One possible ruling would block the import of any product built using stolen trade secrets, such as batteries built by SKI abroad. It could also halt the U.S. production of batteries using stolen techniques, and prevent the import of products that integrate infringing components. That means that cars built with SKI batteries could be blocked from import into the U.S.

ITC orders can be imposed for decades. LG is hoping for a 10-year exclusion order. But an order of as little as five years could be devastating to SKI’s battery business, since automakers are in the midst of planning huge new slates of EVs and long-term supplier relationships.

It may seem strange that the ITC is poised to issue a potentially harsh punishment on the basis of a default judgment, rather than a full hearing of the case. But there is a recent precedent that does not bode well for SKI. In 2018, the ITC imposed a 25-year exclusion order based on a default judgment against Organik Kimya, a chemicals firm that destroyed evidence after being accused of trade secrets theft by Dow Chemical.

LG and SKI could reach a compromise outside of the courtroom. “Often times after you get an injunction, it’s a bargaining chip,” says Lemley, “and then the companies settle.” LG Chem, for instance, could let SKI license its technology in exchange for a large cash payment. An LG executive, who did not want to be identified as commenting on pending legal matters, told Fortune that LG has been negotiating with SKI over a possible settlement, but that those negotiations have so far been unsuccessful.

A SKI spokesperson maintains that SKI is “confident in our case before the ITC. We also are committed to doing everything within our power to ensure the SK Innovation battery site in Georgia produces the batteries needed by our customers.” That could, SKI says, include appealing the pending penalty decision in federal court. But when Organik Kimya pursued an appeal in its similar case, the ITC order was upheld.

SKI does have one other possible savior: Donald Trump. ITC decisions are subject to a 30-day review during which the President can overturn them. Lemley says such intervention is rare, and usually driven by serious worries about public health and safety, rather than business or financial concerns.

Lemley also notes that the Trump administration “does not strike me as likely to think access to battery electric-vehicle technology is important and essential.”

Collateral damage”

ITC board members are political appointees—of the current board, three were nominated by President Trump and two by former President Obama—and experts say they may be swayed by political pressure. That pressure is particularly strong from Georgia legislators, including Rep. Doug Collins, who initially argued that a harsh penalty would cost U.S. jobs at the plant in Commerce, run by subsidiary SK Battery America.

Unfortunately, SKI itself may have undermined that position. In May, Customs and Border Patrol stopped 33 Korean nationals attempting to enter the U.S. in Atlanta using fraudulent employment documents. In September, 13 more Koreans were arrested at the Commerce factory site by immigration authorities.

SKI admitted the workers arrested in May were headed for its factory, but blamed its contractors for the violation. Unions in Georgia nonetheless believe that Korean workers at the factory have taken jobs that should go to Americans, and reporters have found evidence of large numbers of Korean workers living in dormitory-style houses near the construction site.

That discovery led Rep. Collins in particular to shift his tone, describing SKI’s use of foreign labor as “illegal and immoral” and “disgusting and a betrayal to Georgia taxpayers who have invested heavily in SK’s development in Jackson County.”

Both Ford and VW have warned the ITC that a ban against SKI would disrupt their supply of batteries seriously enough to make them, in VW’s words, “collateral damage.” VW signed a North America battery deal with SKI in 2018, while Ford the same year partnered with SKI to supply batteries for an electric version of its F-150 truck. VW described the potential supply disruption as “catastrophic,” and Ford warned that it could not easily replace a lost battery supplier, partly because of supply constraints and long development lead times.

LG argues, however, that both Ford and VW should have seen trouble coming. LG began legal proceedings against SKI in Korea in 2017, before either of the deals was inked, and an early judgment against SKI was handed down in Korean court in February of 2018.

LG Chem has said that it would be able to fill SKI’s shoes in the U.S. In fact, LG already provides VW with batteries in Europe.

More must-read tech coverage from Fortune:


Source link