THE ECONOMIC ESPIONAGE ACT OF 1996: THE THEFT OF TRADE SECRETS IS NOW A FEDERAL CRIME

R. MARK HALLIGAN, ESQ.

mhallign@execpc.com

Copyright 1996-1997 R. Mark Halligan, Esq.

On October 11, 1996, President Clinton signed "The Economic Espionage Act of 1996" into law. The theft of trade secrets is now a federal criminal offense. This is a major development in the law of trade secrets in the United States and internationally. The Department of Justice now has sweeping authority to prosecute trade secret theft whether it is in the United States, via the Internet, or outside the United States.

Section 1832 of the Act makes it a federal criminal act for any person to convert a trade secret to his own benefit or the benefit of others intending or knowing that the offense will injure any owner of the trade secret. The conversion of a trade secret is defined broadly to cover every conceivable act of trade secret misappropriation including theft, appropriation without authorization, concealment, fraud artifice, deception, copying without authorization, duplication, sketches, drawings, photographs, downloads, uploads, alterations, destruction, photocopies, transmissions, deliveries, mail, communications, or other transfers or conveyances of such trade secrets without authorization.

The Act also makes it a federal criminal offense to receive, buy or possess the trade secret information of another person knowing the same to have been stolen, appropriated, obtained or converted without the trade secret owner's authorization.The definition of a "trade secret" in the Act generally tracks the definition of a trade secret in the Uniform Trade Secrets Act but expands the definition of a trade secret to include the new technological ways that trade secrets are created and stored.

The term "trade secret" means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

A violation of Section 1832 can result in stiff criminal penalties. A person who commits an offense in violation of Section 1832 can be imprisoned up to 10 years in prison and fined up to $500,000. A corporation or other organization can be fined up to $5,000,000. If the trade secret theft benefits a foreign government, foreign instrumentality or foreign agent, the penalties are even greater.

Section 1831 provides that a person can be imprisoned up to 15 years and fined up to $500,000 if the offense is committed "intending or knowing" that the offense will "benefit a foreign government, foreign instrumentality or foreign agent." A corporation or other organization can be fined up to $10,000,000. A "foreign instrumentality" is defined under the Act to mean any agency, bureau, ministry, component, institution, association, or any legal, commercial or business organization, corporation, firm or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government. In turn, the term "foreign agent" is defined by the Act to mean any officers, employee, proxy servant, delegate, or representative of a foreign government.

Both "attempts to" commit Section 1831-1832 offenses and "conspiracies" to commit Section 1831-1832 offenses are proscribed by the Act. The same penalties apply to these offenses with increased penalties if the trade secret misappropriation benefits foreign government, foreign instrumentality or a foreign agent.

Under the Act, there is also criminal forfeiture to the United States of (1) any property constituting or derived from the proceeds of violations of the Act, and (2) the forfeiture of any property used or intended to be used, in any manner or part, to commit or facilitate a violation of the Act. The criminal forfeiture provisions will now enable Federal prosecutors to dismantle entire Internet networks and seek criminal forfeiture of all the computers, printers and other devices used to commit or facilitate the offenses proscribed by the Act.

The Act also authorizes the Attorney General, Deputy Attorney General, or Assistant Attorney General in the Criminal Division of the Justice Department to apply for a federal court order authorizing or approving the interception of wore or oral communications by the FBI or other federal agencies having responsibility for the investigation of the offense. These are the same investigative tools available in other federal criminal prosecutions.

The Act also applies to offenses committed outside the United States if (1) the offender is a citizen or permanent resident alien of the United States, (2) if the corporation or other organization was incorporated or organized in the United States, or (3) an act in furtherance of the offense was committed in the United States. These extraterritorial provisions in the Act will provide the Justice Department with broad authority to prosecute the international theft of trade secrets and will prevent the wilful evasion of liability for trade secret misappropriation by using the Internet or other means to transfer the trade secret information outside the United States.

The Attorney General is also authorized to commence civil actions to obtain injunctive relief to protect the trade secret owner from any violations or further violations of the Act. There is no requirement in the Act that criminal indictments be issued first. Therefore, the Justice Department may commence civil actions for injunctive relief at any stage of the investigation. In any prosecution or other proceeding under the Act, the Court is required to issue protective orders and to take such other action as be necessary to preserve the confidentiality of the trade secrets consistent with the Federal Rules of Criminal and Civil Procedure. The federal courts have exclusive original jurisdiction. However, the Act states that it shall not be construed to preempt or displace any other remedies, whether civil or criminal, relating to the misappropriation or theft of trade secrets, or the otherwise lawful disclosure of information required by law, or necessary actions by a governmental entity of the United States, a State or a political subdivision of a State.

The Economic Espionage Act of 1996 now creates federal trade secret rights. Although there is no private cause of action for trade secret misappropriation under the Act, the federal criminal penalties imposed for the misappropriation of trade secrets are generally more severe than criminal violations of other intellectual property rights. Persons engaged in trade secret misappropriation can no longer be assured that liability will be limited to civil remedies and damages imposed for such misconduct.

By passage of this legislation,  the United States now recognizes that the protection of trade secrets is vital to the U.S. economy. Companies are now spending millions of dollars to create and protect trade secret information from competitors. Unless there are strong deterrents to trade secret theft, the competitive advantage of U.S. companies, afforded by trade secrets, will inevitably be stifled. Intangible property assets are often more valuable to the prosperity of U.S. companies than tangible assets. Many manufacturing operations are being moved offshore with the U.S. companies instead producing and licensing the intellectual property and "know-how" to produce such products.

The protection of trade secrets is now becoming increasingly important to the competitiveness of American industry and the economic strength of the United States. At the same time that these structural changes have been occurring in the U.S. economy, the world has been undergoing a computer revolution. Since at least the beginning of the 1990s, the power of computer technology has grown exponentially resulting in increasingly more powerful means for the theft and transfer of trade secret information.

The rapid growth of the Internet is a reflection of this exponential growth. The Internet can now be used as a tool for the destruction of trade secret rights. Today, an item of trade secret information (such as computer source code, a biochemical formula, or technical schematics) can be as valuable to a company as an entire factory was even several years ago. Computers now make it extremely easy to surreptitiously copy and transfer this valuable trade secret information. An employee can now download trade secret information from the Company's computer on a diskette, take it home and scan the information on the hard drive of a home computer, and then upload it to the Internet where it can be transmitted within minutes to any part of the world. The receiving party, in turn, can do the same thing within minutes. Within days, a U.S. company can lose complete control over its trade secret rights forever.

Existing federal laws have been inadequate to protect against this new high-tech theft of intellectual property rights. If an arsonist burns downs the factory, there are criminal laws to prosecute against this misconduct. However, if a company is destroyed by trade secret theft, the company's only remedy is often civil litigation for trade secret misappropriation. Up until now, federal prosecutors have relied primarily upon the National Stolen Property Act and the wire and mail fraud statutes to commence criminal prosecutions for trade secret theft. The National Stolen Property Act was enacted by Congress in 1934 to prevent criminals from evading state prosecutions by fleeing in automobiles across state lines with stolen property. Prosecutions under 18 U.S.C. § 2314 require the government to prove that "goods, wares or merchandise" were transported in "interstate or foreign commerce" and that the defendant knew that they were "stolen, converted or taken by fraud." Trade secret prosecutions under this Act have been difficult because some courts have held that the theft of "purely intellectual property" does not constitute the theft of "goods, wares or merchandise" as required by 18 U.S.C. § 2314.31.

The federal mail and wire fraud statutes have likewise not been well suited to prosecute all forms of trade secret misappropriation. These statutes prohibit devising any scheme involving use of the mails or interstate wire transmission for obtaining "property" by false pretenses or representations. Although the Courts have not had a difficult time finding that "property" includes intangible property for purposes of these statutes, prosecutions have been difficult because the government must prove a "scheme to defraud" and then use of the mail or wire transmissions in order to obtain a conviction for trade secret theft.

The legislative history makes it clear that one of the primary reasons for enacting the Economic Espionage Act of 1996 was to fill these existing gaps in current federal law and to create a national scheme to protect U.S. proprietary economic information. Civil remedies alone are often insufficient to deter trade secret misappropriation. The Congress observed that many companies forego civil suits because the defendant is often judgment-proof, or the company does not have the financial resources to bring a civil action, or the company does not have the necessary investigative resources to pursue a sophisticated trade secret theft. Further, even if a company does bring suit, the civil penalties are often absorbed by the offenders as a cost of doing business. Most state criminal laws dealing with this type of theft are only misdemeanors and such state laws are rarely used by State prosecutors.

Prosecutorial discretion will be critical to the success of the Economic Espionage Act of 1996. One of the Senate versions of the bill (S. 1556) required the Attorney General, the Deputy Attorney General, or the Attorney General for the Criminal Division of the Justice Department to "personally approve" any prosecutions under the Act. However, this section ("Prior Authorization Requirement") was left out of the final version of the bill.

Often times in civil litigation, it is difficult to determine whether the alleged trade secret constitutes the "general knowledge, skills or experience" of the former employee or the valid "trade secret" information of the former employee. To avoid constitutional infirmities, there should be no federal prosecutions when the conduct of the defendant falls within this grey area. The remedies should be limited to civil actions under such circumstances. Proof of "knowledge or intent" to convert the trade secret to the detriment of the trade secret owner should also be held to strict proof.

The right of competition, the free and unfettered right of individuals to move from one company to another, and the right of individuals to use their general knowledge, skills and experience should not be injured or chilled in any way by this new federal legislation. The Economic Espionage Act of 1996 is a major development in the law of trade secrets in the United States and internationally. If this new legislation is not misused by overzealous Federal prosecutors, the result will be continued growth and vitality of trade secret rights, increased competitiveness, and increased economic strength of the United States in the international marketplace. The Internet will also be effectively eliminated as a tool for the destruction of trade secret rights in the United States and abroad.

For further information, contact R. Mark Halligan, Esq. mhallign@execpc.com

(312) 526-1559 (direct) (312) 526-1560(fax) 1-888-868-0285(toll free-emergencies only)