I have made cryptic reference in past posts to the as-yet-not-and-perhaps-never-to-be-published book I all too rarely revisit. It stands at about 45,000 words at present, halfway to a novel, non-fiction mind you.
Chapter 11 - What’s a
3Leaf?
If there is one thing Huawei has (hopefully) learned over the
last five years, it is that companies with numbers in their names ought perhaps
to be avoided when it comes to potential "acquisitions." First 3Com, then 2Wire, then 3Leaf…
Flash back yet again to mid-summer 2010: Just as Motorola was
extending its Lemko suit to Huawei, and as the Senator from Arizona was sharpening his poison
pen, Huawei’s outside legal counsel took a call from someone within the
Committee on Foreign Investment in the United States (CFIUS).
CFIUS, mentioned earlier, is an inter-agency committee of the
U.S. Government that reviews the national security implications of foreign
investments in U.S. companies or operations. Chaired by the Secretary of the
Treasury, CFIUS includes representatives from 16 U.S. departments and agencies,
including the Defense, State and Commerce and Homeland Security
Departments.
Foreign companies proposing
to acquire U.S. firms or U.S. firms expecting to be acquired by foreign
companies are required to inform CFIUS in advance so that the Committee can conduct
a review, if deemed necessary.
In the late Spring of 2010, a bankrupt California-based
start-up approached the Huawei research and development team in Santa Clara
offering a fire sale on some ASIC-based virtualization patents.
Huawei already had a number of virtualization solutions in
the tank but the offer was intriguing so Huawei’s California folk consulted
California outside counsel who advised that before doing anything Huawei should
seek Commerce Department advice on whether the technology was sensitive and
thus export controlled.
This was done,
and Commerce ultimately communicated that the technology was not export
controlled.
In the ensuing weeks, Huawei purchased the patents, hired
some former 3Leaf employees and separately purchased some former 3Leaf servers
and equipment that were being sold off by creditors.
And then, in July - spurred (it is rumored) by a DoD employee who was trawling LinkedIn
for all things Huawei-related and in so doing stumbled on an individual’s
updated profile referencing a change in employment - our DC outside counsel was
contacted by CFIUS asking why Huawei had not filed for the Committee’s approval
of the deal.
From there, things quickly spiraled utterly out-of-control and in
all sorts of irrational directions.
It is not CFIUS’s business to understand that large global
companies might have eager, young, inexperienced folk in Silicon Valley who
might engage in transactions without considering political or national security
implications.
But one might expect the
Committee to have some basic understanding of how multinational ICT companies
function.
Nevertheless, CFIUS seemed to be telegraphing the perception
– which I heard from multiple folk in D.C. – that Huawei’s quiet "acquisition" (hardly) of 3Leaf was a blatant attempt to circumvent the review process,
which was ludicrous.
And then there was the matter of the technology itself and
the highly debatable question of whether or not or how it could present a
threat to U.S. national security in Huawei’s hands.
No matter. CFIUS claimed jurisdiction and Huawei had, indeed, screwed up, however inadvertently.
Parallel to the ongoing Sprint RFP, Huawei prepared for a
formal CFIUS submission, which ultimately took place roughly at the same time that the
Secretary of Commerce was calling Sprint’s CEO to torpedo any semblance of open and fair competition in the U.S. telecom infrastructure
equipment market.
The initial CFIUS 30 day review graduated into an additional
45 day investigation, during which time Huawei provided reams of data about the
company, its operations, and countless other topics utterly unrelated to 3Leaf,
responding to dozens and dozens of CFIUS interrogatories.
As the investigation wound down in February, it was made clear
to Huawei that CFIUS would recommend to the President that he endorse a formal
finding that Huawei’s “acquisition” (sigh) of 3Leaf constituted some sort
of a threat to U.S. national security.
The normal course of action in such instances is for the “acquiring”
(I refuse to dignify this mis-labeling, hence the perpetual quotation marks) company to back down from the
deal. In Huawei’s case, since the deal
had already closed, this would mean unwinding the transaction.
Huawei’s lawyers and other advisors all counseled and began
preparing for the obvious.
Meanwhile, within Huawei, there was an agonizing process of
soul-searching underway.
Rightfully, Huawei felt cheated by the process.
Yes, the company had screwed up, but the reality was that
there had never been any intent to circumvent any process nor was there any
reason to believe that the 3Leaf technology presented some sort of threat to
national security and, well, Huawei itself didn’t present any such threat,
notwithstanding free-wheeling D.C.-based slandering to the contrary.
Bottom line: From our perspective, Huawei was effectively being held hostage to the
process, a process that was perceived, within the company (and by scarce few
externally), to be driven by anti-China, anti-Huawei politics, and little else.
So, at the last minute, Huawei decided to, um, thumb its nose at
CFIUS.
A comprehensive communications plan was put into place. The company would proclaim its innocence,
re-assert its commitment to openness and transparency, and call for a “real”
investigation of the facts.
This was another watershed moment for Huawei.
Throughout the
process Huawei had had limited interaction with media and other external
stakeholders, sticking to very simple, deferential statements, being nothing
other than cooperative with and respectful to CFIUS. Now, Huawei was going to test its muscle and
engage in the type of PR expected of a world-leading multinational.
Huawei’s lawyers and consultants – PR and GR – were utterly
appalled.
The media ate it up.
Yet, for the most part, the resulting public dialogue didn’t
favor Huawei.
While there were some media reports that commented on the
novelty of Huawei’s response, as perhaps an indication of innocence, for the
most part, the conversation – in the media and in Washington – focused on what
was depicted as Huawei’s utter naïveté.
By refusing to divest of 3Leaf, Huawei was effectively forcing the White
House – within a 10-day window – to announce an almost-certain finding of
threat to national security, a death knell for Huawei in the U.S.
The internal soul-searching continued. The reaction was not what was intended. The media had focused on the tactic rather
than the substance.
So, we reversed ourselves.
We announced that our intent in declining to divest had been
to invite a more impartial investigation, and that we had not meant to stir up
a media storm focused on our tactic instead of our message.
We began the process of unraveling 3Leaf, as directed by
CFIUS. Ironically, our offer to donate
the 3Leaf technology to the U.S. Government was not entertained – a seeming lack of
interest in this terribly sensitive technology - and it found its way into the
hands of a Southern U.S. university.
So, what was the 3Leaf review really all about?
Some have said that Huawei inadvertently put the Committee in
an impossible procedural situation. When
CFIUS reviews an acquisition, to the extent that it determines a potential
threat to national security, often as not, it negotiates with the parties
involved to craft mitigation agreements to address those concerns so that the
transaction can go forward. But Huawei
had already sealed the deal, so how was CFIUS to mitigate after-the-fact?
(There’s some truth to that, but it’s perhaps overly-gracious).
Others have said that CFIUS used Huawei’s screw-up to send a
strong message to the company and others that ignoring the CFIUS process is
done at great peril.
(Again, there's some truth there, but was that really the motivation?)
Yet others have observed that the 3Leaf review was nothing
more than the ongoing demonization of Huawei and all things Chinese.
(Sigh... Winner).
