The Economic Espionage Act

The Economic Espionage Act

In April 2012, the Second Circuit in United States v. Aleynikov reversed the defendant’s conviction under the Economic Espionage Act (EEA) holding that the misappropriated trade secrets were not sufficiently related to a product produced for or placed in interstate or foreign commerce, as required under Section 1832(a).

The defendant, a former employee at Goldman Sachs, was responsible for developing computer programs used in the bank’s high-frequency trading (HFT) system. Goldman Sachs treated the system as proprietary information and implemented various security measures. Among other measures, the bank required employees to sign confidentiality agreements and limited their access to the source code.

On his last day of employment at Goldman Sachs, the defendant copied, encrypted and transferred the source code for the HFT system to a foreign server, allowing him to later download it from the server to his home computer. He then took the code to a meeting with his former employer’s competitor.

Subsequently, the defendant was indicted for theft of trade secrets under 18 U.S.C. § 1832 for misappropriating the code. In his defense, the defendant argued that the code is not protected as trade secret because it was never intended to be placed in interstate or foreign commerce.

The district court disagreed by reasoning that the code was a product that was produced for interstate commerce and sentenced the defendant to 97 months of imprisonment. On appeal, the defendant reiterated the argument that the source code was not related to a product “produced for or placed in interstate or foreign commerce” within the meaning of the EEA.

The Second Circuit reversed the district court and ruled in favor of the defendant, holding that the EEA did not apply to the source code because the HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce because Goldman Sachs did not intend to sell the HTF system or license it to anyone. The Court, however, recognized that the decision appeared to be at odds with the Congressional intent behind the EEA and expressed its hope that Congress would amend the Act appropriately.

In response to the Second Circuit’s decision, the Senate introduced the Theft of Trade Secrets Act of 2012, S. 3642, 112th Cong. (2012), to strengthen the scope of the EEA in the following November.

As amended, Section 1832(a) closes the unintended loophole of Aleynikov by expressly encompassing theft of trade secrets “related to a product or service used in or intended for use” in commerce. Additionally, a more recently proposed amendment*, which was passed by Congress on January 1, 2013 will further amend the EEA by increasing fines for offenders. Further guidance on trade secret valuation methods for purposes of calculating fines is left open for judicial determination.

The broader scope, combined with the recent publicity of the Aleynikov, will likely spur an increase in criminal indictments under the EEA as companies recognize and utilize the Act as a powerful weapon in defense of trade secrets. On the other hand, the broad scope of the EEA applies to more than just intentional theft and, broadly applied, may become a significant hazard for companies that legitimately receive the confidential information of another. Part of the confusion is attributable to the fact that a trade secret can be virtually any type of information, including combinations of public information. Furthermore, misappropriation can occur simply by exceeding authorization, which can sometimes be difficult to determine, even for sophisticated parties.

Companies should therefore invest in understanding the basics of trade secret law and how to properly handle the confidential or proprietary information of another. Failure to do so may not only subject the company to civil liability, but federal criminal liability as well.

 

* On July 29, 2013 two United States Senators proposed legislation to address the theft of US trade secrets by foreign thieves. U.S. Senators Sheldon Whitehouse (D-RI) and Lindsey Graham (R-SC). Proposal can be found here: http://www.whitehouse.senate.gov/download/?id=ac13e02f-0840-4868-ba9c-06f1f8682a9d

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