Law Firm: Cadence Penalty Shows US Expects Cooperation Despite Conflicts With Chinese Law

The case, which marks the first corporate guilty plea coordinated by DOJ and the Bureau of Industry and Security since DOJ’s National Security Division revised its enforcement policies last year, “offers an early window into how that policy may shape future enforcement expectations and negotiations” under the Trump administration, DLA Piper said in a client alert. It shows a “willingness to pursue aggressive, coordinated criminal and civil enforcement” against export control violators, the firm said.

Wilmer Hale also said the penalty demonstrates that companies involved in U.S. technology transfers to China “should be prepared to navigate an aggressive regulatory enforcement environment,” adding that businesses should consider “enhanced screening measures” and placing language in their contracts to mitigate any China-related export control risks.

“The steep penalties, together with prospective compliance program requirements, are a clear signal that DOJ and Commerce remain committed to continuing their joint efforts to hold accountable those companies that commit national security-related export violations,” the firm said.

As part of its settlement with DOJ, Cadence received partial credit for arranging interviews with employees in the U.S. and giving the U.S. government other key documents to aid its investigation. But DOJ didn’t give the company full cooperation credit because it “failed to proactively obtain certain communications by employees and to proactively facilitate interviews” of China-based employees “that would have been relevant” to the export control breaches, Crowell & Moring said.

The firm noted that Chinese companies, along with multinational companies with businesses in China, still face challenges trying to comply with both U.S. and Chinese laws. China’s Anti-Foreign Sanctions Law gives Beijing broad discretion to penalize companies for obeying U.S. and other countries' restrictions against China (see 2309270039), and China in May threatened to penalize any person or company that complies with certain BIS export control guidance about advanced Huawei chips (see 2505210022).

The Cadence settlement “reflects that U.S. enforcement agencies typically react unfavorably to claimed difficulties by companies in providing to the government information located in China, such as from the company’s offices or its subsidiaries in China,” Crowell said. It added that DOJ expects “full disclosure of relevant information no matter where kept,” and the agency will ask “probing questions” if a company says it can’t produce that information “based on assertions that it would violate foreign law.” DOJ “weighs companies’ efforts and success in surmounting such barriers in assessing credibility and cooperation credit,” the firm said.

“As a result, conducting investigations and discovery in China and jurisdictions with similar secrecy laws increasingly demands specialized expertise and careful planning, as pressures on companies doing business with and in China continue to mount.”

Fenwick added that DOJ held Cadence liable for the conduct of its indirectly owned China subsidiary “on the premise that the China subsidiary acted as Cadence’s agent.” The law firm said DOJ likely “leaned on Cadence to enter a guilty plea for the acts of the Chinese employees to send a corporate compliance message to U.S. corporations.” This may also signal DOJ’s “acknowledgement of the practical infeasibility of getting a Chinese company to enter a U.S. criminal plea agreement for violations of U.S. laws targeting China that conflict with China’s Anti-Foreign Sanctions Law.”

DLA Piper said the case also highlights a key compliance challenge faced by exporters: how to decide when a customer is an alias or a front company for a party on the Entity List. The U.S. said Cadence and its Chinese subsidiary had “reason to know” that they were providing electronic design automation (EDA) tools to an alias and an associated entity for National University of Defense Technology, which is on the Entity List.

BIS has said exporters need to analyze whether a customer has ties to an Entity Listed company, DLA Piper noted, and transactions with affiliates of an Entity Listed party may require a license even if the affiliate isn’t on the list.

The Cadence case “may prompt exporters to refresh their review of exports to affiliated entities more closely -- including ones that may not trigger a hit in screening -- by looking at factors like shared employees and co-location to assess whether an entity is an ‘alias’ or front company for a listed company,” the law firm said.

The penalty also highlights the Trump administration’s seemingly “measured” approach to corporate compliance monitors, the law firm said. The agency in May said it wanted to limit the use of government-ordered monitors (see 2505130017).

“DOJ’s decision to not require a compliance monitor in the Cadence case illustrates greater restraint across DOJ in imposing ‘heavy-handed intervention’ upon companies,” the firm said, “but still requiring self-reporting compliance obligations to ensure a sufficient compliance program to protect US national security interests.”

Those compliance obligations include a “demanding suite of post-resolution compliance and reporting requirements” for Cadence, DLA Piper said, noting that the company must carry out two “comprehensive, independent internal audits of its global export-control compliance program,” including of its Shanghai subsidiary.

Paul Weiss said the case shows that the U.S. is willing to pursue both civil and criminal penalties for export control violators, and underscores that companies need to stay aware of ongoing “export control developments” and should consider “proactive engagement with regulators.” The firm specifically pointed to the is-informed letters BIS sent to Synopsis and Cadence earlier this year, which informed them of new license restrictions for certain EDA exports to China (see 2505300006). The administration rescinded those requirements soon after reaching an agreement with Beijing to rein in its export curbs over critical minerals (see 2507030009).

“The episode underscores how quickly the regulatory landscape can shift,” Paul Weiss said, “and the need for companies to maintain robust compliance programs and closely monitor regulatory developments.”