Courts Vulnerable to Exfiltration of National Security Technology and Sensitive Intellectual Property Through Bankruptcy Proceedings




State and federal courts are becoming acutely  aware of their vulnerabilities  to cyberattacks on their case management systems, computer networks, websites, and other parts of their information technology infrastructure (see Court Manager Vol. 34 #4 – Winter 2019, “Courts Have a Significant Role to Play in the Whole-of-Government Approach (WGA) to Our Safety and Security”; and  National Center for State Courts, “Current cybersecurity threats highlight need for state courts to have prevention and response policies in place.”
Entrepreneurship and Innovation Keys to Economic Growth
Another vulnerability which poses an oversized threat to our national security but has received far less attention, lies not in courts’ IT infrastructure but in court processes, especially bankruptcy proceedings. Bankruptcy is a legal process through which persons who cannot repay their debts seek relief from those debts.  The link between entrepreneurship, innovation, and economic growth, led policymakers to implement what are called “forgiving” personal bankruptcy laws. A 2008 paper by John Armour at the University of Oxford Faculty of Law, and Douglas Cumming at York University Schulich School of Business, reports empirical findings that support the existence of such a link.  Entrepreneurs are drivers of economic growth through their capacity for innovation and risk-taking. Forgiving personal bankruptcy laws give entrepreneurs a “fresh start,” and thereby increase the supply of entrepreneurs; they encourage continued innovation which are keys to our economic growth and continued prosperity.
Vulnerable Bankruptcy Proceedings
Courts are vulnerable in their legal proceedings, especially in the ways cutting-edge technology information is exposed in open court.  Bankruptcy proceedings have become a unique avenue through which foreign adversaries are able to acquire sensitive national security technologies and intellectual property. Through a detailed analysis of gaps in federal regulations governing foreign investment and bankruptcy proceedings in National Journal of Security Law and Policy, “Full Court Press: Preventing Foreign Adversaries from Exfiltrating National Security Technologies Through Bankruptcy Proceedings,” Camille A. Stewart warns that bankruptcy proceedings, especially, are vulnerable to foreign adversaries who employ a  myriad of techniques  that avoid federal regulations to exfiltrate technology and information that threaten our national security. “Bankruptcy is an important part of U.S. innovation culture, “she writes. Start-ups and individual entrepreneurs take financial risks developing cutting edge technology attractive to foreign adversaries, including national security-related technology and intellectual property. If the innovations of these start-ups and entrepreneurs fail or they exhaust their financial resources, bankruptcy allows them to recover some of their resources by selling their technology and intellectual property to another entity, and thereby continue to innovate. This is in our national interest. 
The problem is that in bankruptcy proceedings, sensitive data and intellectual property are exposed to potential buyers, bidders, creditors, and even the general public. This is especially problematic for so- called “dual-use” technologies -- equipment, software, and intellectual property, items that may have benign private  applications, but also have  applications that, in the hands of foreign adversaries with malicious intent, pose threats to national security. As Stewart warns, the “lure of these cutting-edge technologies make bankruptcy proceedings a vehicle for exfiltration of national security-related technology and IP by U.S. adversaries.”
Stewart cites the example of the labyrinth bankruptcy proceedings of Molycorp, which owned the only U.S. rare earth mine in Mountain Pass, California, at the time of the filing.  Rare earth minerals are used in technology and defense products including magnets for aircraft engines and computer hard drives. Through bankruptcy proceedings in June 2017, Molycorp sold the Mountain Pass mine and the company was restructured allowing it to receive $130 million in debt refinancing.  The new owner of the mine is MP Mine Operations, a consortium with rare earth mining company Leshan Shenghe Rare Earth Company holding a non-voting minority. “In addition to enhancing their own military capabilities,” writes Camille Stewart, citing a number of U.S. security and intelligence sources, “foreign adversaries can leverage the information acquired to discover and exploit vulnerabilities in the technology to launch highly tailored, sophisticated, and potentially catastrophic cyberattacks an to insert the U.S. supply chains malicious or compromised technology that can be exploited at a later time.”
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