The Economic Espionage Act: Federal Protection For Corporate Trade Secrets

With the enactment in 1996 of the Economic Espionage Act [1] ("EEA"), the Federal Government has moved aggressively into the protection of private property rights in trade secrets. The overriding reasons behind the enactment of the legislation were the fully documented efforts of foreign governments to gain access to the trade secrets of U.S. companies, particularly in the high-tech and computer industries, in order to advance the economic interests of their private sector. However, the EEA is not limited to enforcement against foreign governments, or even foreign-based companies. It applies as well to any typical trade secret dispute involving purely domestic concerns. With fines up to $5,000,000 and imprisonment of up to 10 years for the domestic theft of trade secrets, the EEA provides a new and very powerful intellectual property regime that extends well beyond the U.S. borders. This article will briefly review the legislative history of the EEA, compare its provisions with existing, more traditional, protection of trade secrets, discuss the criminal law aspects of the EEA, and provide an update on the cases that have been brought to date under the EEA.

ECONOMIC ESPIONAGE AND THE NEED FOR FEDERAL LEGISLATION

Two major hearings were held in 1996 to consider the need for Federal legislation to prevent the theft of trade secrets as a result of economic espionage. The lead witness in both hearings was the Honorable Louis J. Freeh, Director of the Federal Bureau of Investigation ("FBI"). He was supported in his conviction that new Federal legislation was needed by a number of industry leaders representing principally Silicon Valley and aerospace companies. The organized intellectual property bar did not play a role in the hearings themselves although, since the 1970's, the American Bar Association Section of Intellectual Property Law favored "the enactment of a federal criminal law applicable in appropriate circumstances to the misappropriation of trade secrets." [2]

The hearings amply documented the two major underpinnings of the legislation:

(1) Foreign powers, through a variety of means, are actively involved in stealing critical technologies, data and information from U.S. companies or the U.S. Government for the economic benefit of their own industrial sectors. [3]

(2) Laws then on the books — including the Interstate Transportation of Stolen Property Act and the Mail Fraud and Fraud by Wire statutes — were of virtually no use in prosecuting acts of economic espionage.

With respect to point (1), Director Freeh reported that the FBI was then investigating allegations of economic espionage conducted against the United States by no less than 23 different countries. Those targeted covered the entire spectrum of successful U.S. high-technology industries. [4]

With respect to point (2) — i.e., the inadequacy of then-existing Federal statutes — Director Freeh cited the Supreme Court's Dowling ruling [5] that trade secrets did not constitute physical "goods, wares or merchandise," and that the 1930's Interstate Transportation of Stolen Property Act [6] was not applicable to economic espionage. Similarly, the Mail Fraud statute [7] would only apply to economic espionage involving the use of the mail, and the Fraud by Wire [8] statute requires an intent to defraud as well as the use of wire, radio or television.

State laws protecting trade secrets were likewise determined to be inadequate. As concluded by the Senate Judiciary Committee:

"What State law there is protects proprietary economic information only haphazardly. The majority of States have some form of civil remedy for the theft of such information — either adopting some version of the Uniform Trade Secrets Act, acknowledging a tort for the misappropriation of the information, or enforcing various contractual arrangements dealing with trade secrets. These civil remedies, however, often are insufficient. Many companies choose to forgo civil suits because the thief is essentially judgment proof - a young engineer who has few resources - or too difficult to pursue - a sophisticated foreign company or government. In addition, companies often do not have the resources or the time to bring suit. They also frequently do not have the investigative resources to pursue a case. Even if a company does bring suit, the civil penalties often are absorbed by the offender as a cost of doing business and the stolen information retained for continued use. Only a few States have any form of criminal law dealing with the theft of this type of information. Most such laws are only misdemeanors, and they are rarely used by State prosecutors.

A Federal criminal law is needed because of the international and interstate nature of this activity, because of the sophisticated techniques used to steal proprietary economic information, and because of the national implications of the theft. Moreover, a Federal criminal statute will provide a comprehensive approach to this problem - with clear extraterritoriality, criminal forfeiture, and import-export sanction provisions." [9]

The Federal EEA was seen as a complement to the two-centuries-old patent and copyright laws:

"For many years federal law has protected intellectual property through the patent and copyright laws. With this legislation, Congress will extend vital federal protection to another form of proprietary economic information - trade secrets. There can be no question that the development of proprietary economic information is an integral part of America's economic well-being. Moreover, the nation's economic interests are a part of its national security interests. Thus, threats to the nation's economic interest are threats to the nation's vital security interest." [10]

Given the importance of the EEA as part of this triad of Federal laws protecting intellectual property, it is important for business executives and their counsel to have a thorough understanding of it and its relationship to "traditional" trade secret protection.

THE EEA COMPARED WITH "TRADITIONAL" TRADE SECRET PROTECTION

Five years after a landmark decision by the U.S. Supreme Court holding that the U.S. patent laws did not preempt state protection of corporate trade secrets [11] , the ABA Special Committee on the Uniform Trade Secrets Act approved, and recommended for enactment in all states, the Uniform Trade Secrets Act ("UTSA") [12] . While most states have enacted the UTSA in some form, the trade secret protection granted in each state is far from uniform relative to the other states. This often leads to the result that the ability to recover for theft of a trade secret becomes a choice of law or contract interpretation question.

Before looking at the differences between the EEA and the UTSA [13] , it is important to note that there are other Federal criminal statutes relating to trade secrets. In particular, 18 USC § 1905 prohibits the unauthorized disclosure of confidential information by any officer or employee of the U.S. government, or any department or agency, when that information has been received in the course of employment or official duties, unless the disclosure is authorized by law. [14] That law is of special importance to high-technology companies doing business with the Federal Government.

The EEA amends Title 18 of the United States Code by adding new chapter 90, §§ 1831 1839. This Act has two primary thrusts: (1) prevention of trade secret theft by a foreign government agent or instrumentality (hereinafter "foreign entity") or person acting on behalf of a foreign government or entity [15] and (2) general protection from theft of trade secrets by anyone. [16]

Definition of "Trade Secret"

Implicit within both section 1831 and 1832 is the definition of "trade secret." [17]

In the House Report, the House noted that the definition of trade secret in the EEA is based on the definition used in the UTSA. [18] However, in the EEA, Congress has more explicitly listed a variety of types of information, and means for storage of that information, that are not explicitly set forth in the UTSA. In so doing Congress has attempted to update the definition of "trade secret" to keep pace with growing technology, especially in the computer and information storage sectors. [19]

Further, and more importantly, the EEA specifies two conditions which must be met in order for information to qualify for protection as a trade secret under the Act. Once again these requirements mirror the two requirements present in the UTSA, but with one major difference. In the EEA definition, the information must have actual or potential independent economic value from not being generally known to or readily ascertainable through proper means by the public. However, the UTSA is more limited in its corresponding provision by requiring that the person or persons obtaining the information by improper means must be one who can obtain economic value from disclosure or use of that information.

When a foreign government or entity is involved in the trade secret theft, the EEA covers any benefit obtained by the misappropriation of the trade secret, not just an economic one. If the theft is wholly a domestic affair, the theft must convey an economic benefit on the recipient. Accordingly, in the domestic case, "a person who discloses a trade secret, but who does not intend to gain economically from it, or intends that some other person economically gain from [it], cannot be charged" under the EEA. [20]

In addition, in the domestic situation, the government must show that the defendant knew, or was aware with practical certainty, that his conduct would disadvantage the rightful owner of this information. [21] Thus, the EEA provides for considerably broader protection for trade secrets that are of international interest, compared to trade secrets that are purely domestic in their reach.

Definition of "Owner"

Another important difference between the EEA and the UTSA is in the definition of an "owner" of a trade secret. The EEA defines "owner" as a "person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed." [22] The UTSA, however, covers misappropriation of a trade secret, even by a licensee, if the trade secret is disclosed or used without implied or actual consent, and if the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use. [23] Since most license agreements contain confidentiality clauses, the UTSA would appear to cover situations of disclosure of a trade secret by a licensee within its definition of misappropriation.

This appears to leave exposed the situation where a licensee uses or discloses trade secret information beyond the scope allowed in the license agreement. While these situations could be just as damaging to the rightful owner (licensor) as theft by a non-licensee, it is not at all clear whether such situations could be prosecuted under the EEA. In view of this, licensors of trade secrets should consider including in any license agreement a section that clearly defines which party is the "owner" of the proprietary information being licensed, and any improvements thereon, as the term "owner" is defined in the EEA. [24]

The EEA provides several types of penalties for a violation including imprisonment, fines, criminal forfeiture and injunctive relief. [25] Injunctive relief may be obtained by the Attorney General in a civil action to enjoin violation of the EEA. [26] However, this right is reserved to the Federal Government. [27] Such civil action must be brought in a U.S. district court, as they have original exclusive jurisdiction over civil actions under the EEA Section 1836. [28]

By contrast the UTSA only provides civil remedies, such as punitive damages and injunctive relief, along with actual damages and damages for unjust enrichment. [29]

One limitation included in the EEA concerns the applicability of the law to conduct outside the U.S. Since many U.S. corporations have assets and operations overseas, what happens if the theft occurs outside the boundaries of the U.S.? Section 1837 addresses the extraterritoriality of the EEA and provides that the EEA applies to conduct outside the U.S. only if (1) the offender is (a) a natural person who is a citizen or permanent resident of the U.S. or (b) an organization organized under U.S. or state laws (or a political subdivision thereof) or (2) an act in furtherance of the crime was committed in the U.S. This stretches extraterritoriality about as far as possible. Thus, the EEA does not appear to protect U.S. corporations having places of business outside the U.S., when the offender is a foreign national and the act takes place in any foreign country. The "take home" message of section 1837 is that trade secrets should be closely guarded at all times, but especially when those trade secrets are being used, or are located, outside of U.S. boundaries.

Contrary to the preemption provisions of the UTSA, the EEA states:

"This chapter shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession or territory law for the misappropriation of a trade secret. "(emphasis added) [30]

Additionally, the EEA allows for the lawful disclosure of information under the Freedom of Information Act. [31]

"General Knowledge, Skills and Expertise"

Probably the most troublesome feature of the EEA relates to its applicability in instances in which an employee of company X, having knowledge of company X trade secret information, changes jobs to work for competitor company Y. When the employee performs work for company Y using skill and knowledge obtained during employment at company X, is the employee in violation of the EEA? How can company X protect itself from loss of its trade secrets? Conversely, how can the employee be expected to forget what he has learned when going to work for company Y? The problem is that the employee cannot simply forget the trade secrets of company X and must therefore attempt to compartmentalize the various bits of knowledge and expertise gained while in the employ of company X.

Early versions of the EEA included a passage stating that "knowledge, experience, training or skill that a person lawfully acquires during their work as an employee or independent contractor" for another person was not included in the term "proprietary economic information." [32] This provision was later removed and the term "proprietary economic information" changed to "trade secret." [33] The legislative history indicates that the EEA is not intended to be used to prosecute persons who use generic business knowledge to compete with former employees. The House Report states:

". under the new offense, the government is required to prove that the defendant has wrongfully copied or otherwise exerted control over a 'trade secret.' The definition of trade secret requires that the owner of the information must have taken objectively reasonable and active measures to protect the information from becoming known to unauthorized persons." [34]

Unfortunately, this still leaves an employee in a dilemma as to what among his business/technical knowledge is considered "general knowledge" and what is over the line and classified as a "trade secret." Further it leaves company Y in the difficult position of hiring the employee for his knowledge and expertise and then having to tell him that he can only use portions of it, thus potentially limiting his effectiveness on the job, or limiting his job mobility. [35]

THE ECONOMIC ESPIONAGE ACT IS A CRIMINAL LAW: CRIMINAL LAW AND PROCEDURE APPLY

Employees and Businesses need to be aware of the important difference between the EEA, which is truly a criminal law, and civil suits. Unlike civil suits, the FBI will handle the investigation, and United States Attorneys will prosecute the alleged offenders. Thus, companies otherwise without resources to support litigation now may be able to enlist the help of the federal government to protect their trade secrets. And the Speedy Trial provisions of the Sixth Amendment means that these cases will be resolved significantly faster than most civil disputes. These cases should take approximately one year to prosecute. Of course, those accused of violating this Act enjoy the usual Constitutional protections. Moreover, to convict, a jury must find an accused guilty "beyond a reasonable doubt" as compared with the much lower "preponderance of evidence" standard of civil trials.

The legislation itself directly contains sections promoting the victim's interests. For example, courts must take all "necessary and appropriate" measures to preserve the confidentiality of the relevant trade secrets in a criminal or other proceeding under the EEA. [36] If a District Court ignores the statute's confidentiality requirement and authorizes the material's disclosure, the United States may take an interlocutory appeal. [37]

The EEA contains victim compensation provisions which allow the government to confiscate any property used to commit a crime, as well as proceeds generated from the theft. [38] Courts may then award this property to victims. The Department of Justice has an agency policy of providing restitution to victims where possible; accordingly, the EEA affords victims priority when distributing the forfeited property. [39] The fines, however, will be retained by the government. It is not hard to imagine a case where heavy fines will impoverish a defendant, making restitution impossible and an victim business uncompensated. The fines could also render a civil, companion-trial moot for the same reason. [40]

Perhaps the biggest adjustment business executives will have to make concerns the shift of power from the victimized business to the prosecutor. In all criminal prosecutions the prosecutor - not the victim -- is in control. Consequently, victim businesses will lack the power to direct the prosecution, engage in negotiations, or even dismiss the case. Recently, the California Supreme Court disqualified a district attorney's office because the prosecutors received funding from a "victim business" to help defray prosecution costs. [41] As noted below, the U.S. Court of Appeals for the Third Circuit expressed serious concern over the involvement of Bristol Myers Squibb personnel with the prosecution attorneys from the Justice Department in the Taxol case. Businesses who are used to relying on their own counsel, whether in-house or a law firm, will have to learn to deal with "strangers" from the U.S. Attorney's office, and their control and input into the case will be sharply limited.

Penalties under the Economic Espionage Act

Violations of this new law should cause most business executives to gasp. The following chart highlights the maximum fines and prison sentences available under the EEA.

Section 1832 Penalties (Domestic Economic Espionage)

Section 1831 Penalties (Economic Espionage Benefitting a Foreign Country)

Enforcement Priorities of the Department of Justice

As a result of concerns that enforcement of the EEA could result in the punishment of innocent competitors embroiled in standard trade secret disputes, Attorney General Janet Reno announced that, for the first five years after enactment, all EEA complaints must be reviewed and approved at the highest levels of the Department of Justice before any charges are filed. [42] This also requires that all "prosecutions [will] continue to be approved and diligently supervised by the Executive Office of the United States Attorney." [43] Under this policy, only three officers can authorize a prosecution under the EEA: the Attorney General, the Deputy Attorney General, or the Assistant Attorney General for the Criminal Division. [44] Any case that goes forward without prior approval must be reported to the Senate and House Judiciary Committees, and sanctions may be imposed on the attorneys involved. [45] Moreover, the Department of Justice will prosecute all cases arising under this law. Overlaying the EEA with these procedural "safeguards" insures that any charges filed under the EEA will receive close scrutiny. At the same time, it introduces a political dimension to this "white-collar" criminal statute.

UPDATE ON EEA CASES

To date there have been 11 cases brought under the EEA, with six resulting in guilty pleas. A recent report noted that the FBI is currently investigating approximately 800 EEA cases. [46]

In the Eastern District of Texas, two men, Brian Russell Pringle and Steven Craig Hallstead of Computer Solution Specialists in Anaheim, Cal., have been charged with theft of trade secrets, conspiracy to steal trade secrets and interstate transportation of stolen goods in the theft and attempt to sell five prototype "Slot II" computers by Intel to the Cyrix Corporation, a computer chip manufacturer in Richardson, Texas. [47] Using an internet ad, Pringle and Hallstead allegedly advertised the availability of these five prototype Intel CPUs. Working with the FBI, Cyrix and Intel arranged for Pringle and Hallstead to bring the CPUs to the Cyrix location in Texas for Cyrix personnel to inspect and hopefully purchase. Once the CPUs were identified as the five stolen from Intel in California, Hallstead and Pringle were arrested. Each of Hallstead and Pringle has pled guilty and await sentencing. They each face up to 10 years in prison, a $250,000 fine or twice the amount of loss to the victim Intel, and three years of supervised release.

In a case described by the FBI as a straightforward theft of trade secrets case with a computer-age twist, Caryn L. Camp and Stephen R. Martin were charged with conspiracy to steal trade secrets, wire fraud, mail fraud, conspiracy to transport stolen goods and interstate transportation of stolen goods. [48] Camp and Martin stand accused of conspiring to steal proprietary information related to a veterinary test kit developed by Idexx Laboratories of Maine. Camp, an Idexx employee, had allegedly applied via internet for a job with Martin in California. Prosecutors say that Camp used e-mail, the Postal Service and commercial carriers to send Idexx documents covering the test kit and business information such as customer lists and sales reports to Martin. Ultimately, it was this use of e-mail that led to Camp and Martin getting caught, as Camp misdirected an e-mail message intended for Martin to a co-employee at Idexx. According to the 15-count indictment, the message stated:

"They know I've been stealing, so to speak, from the company and sending info to someone. Can I go to jail for this? I am so scared. At least your whole name's not mentioned, nor your company. So I guess it could be worse. But I don't think by much."

Martin's companies, described as Wyoming DnaVaccine and Maverick Technologies according to the indictment, apparently have no employees or assets. Thus, Camp's attorney, Thomas Connolly (also Democratic candidate for Governor of Maine) has questioned Martin's ability to use any information he allegedly received from Camp. The U.S. Attorney notes that no Idexx trade secrets ever reached Idexx competitors. Camp and Martin have each pled not guilty to the charges.

The Deloitte-Touche Case

The U.S. Attorney's Office in Houston, Texas brought a two-count indictment under the EEA against Mayra Justin Trujillo-Cohen, for allegedly stealing proprietary software — the "4FRONT for SAP" and "FASTRACK 4SAP" programs — developed by Deloitte-Touche. [49] , [50] According to the grand jury charges, Trujillo-Cohen, a former Deloitte-Touche employee, converted portions of the software programs, which she knew to be proprietary to Deloitte-Touche, by selling it to others for her personal benefit. This was later amended to include one count of mail fraud under 18 USC 1343.

In a plea agreement, Trujillo-Cohen pled guilty to one count under the EEA and one count of mail fraud. She was sentenced to concurrent terms of 48 months in prison on each of the EEA and mail fraud counts, followed by 3 years of supervised release. In addition, she was ordered to pay restitution in the amount of approximately $337,000 payable in full immediately.

In United States v. Worthing, Patrick and Daniel Worthing were indicted for allegedly stealing confidential fiberglass manufacturing and production information, valued at $20 million, from the Pittsburgh-based PPG Industries. [51] Patrick Worthing worked at PPG under a contract with Affiliated Building Services as the supervisor of a maintenance crew at one of PPG's research and development facilities. With access to every office, he surreptitiously collected PPG's proprietary information, including diskettes, blueprints and other confidential research materials relating to fiberglass. Daniel reportedly agreed to help his brother in the scheme for $100. The indictment was based on an FBI sting operation prompted by a letter to Owens-Corning Fiberglass indicating that confidential PPG information could be made available to them.

Both defendants pleaded guilty, with Daniel Worthing, who cooperated with the Government, being sentenced to five years' probation, six months of home confinement and 100 hours of community service, and Patrick Worthing sentenced to a 15-month prison sentence, followed by three years' probation. [52]

Kai-Lo Hsu, a technical director for Taiwan's Yuen Foong Paper Company, and Chester S. Ho, a biochemist and professor at a Taiwan university, both Taiwanese nationals, were arrested by the FBI on June 14, 1997 for alleged attempts to steal trade secrets from the Bristol-Myers Squibb Company involving the production of the anti-cancer drug Taxol. [53] , [54] Although this was the first case in which the EEA was used against foreign nationals, it was brought under § 1832 of the EEA and does not involve allegations that they were working for or are agents of a foreign instrumentality. The case also involves an arrest warrant for Jessica Chan, now believed to be in Taiwan, which does not have an extradition treaty with the United States. Reportedly, the Yuen Foong Paper Company is still under investigation for possible indictment under the EEA.

The trade secrets in question relate to a new process for the production of Taxol by genetic engineering. An FBI sting operation resulted in the arrest on June 14, 1997 of Hsu and Ho, with a Bristol-Myers executive posing as a corrupt Bristol-Myers scientist willing to sell Taxol production secrets to the defendants. While at no time did the defendants gain possession of either the details of the trade secret or the cell lines used to grow Taxol cultures, the defendants did review documents purportedly containing the trade secrets during the sting operation, while in the presence of FBI underc