The modern business arena emphasizes the value of trade secrets as an essential part of most businesses. Intellectual property, ranging from technological innovations, to business methodology, formulas, and confidential customers lists, products, market analysis and demands can form the most valuable assets in a business. As one experienced entrepreneur wrote to the writer, “What I really sell is my expertise and experience which developed unique products which do unique things. You call them intellectual property. I call it my last twenty years of efforts.”
And like any asset, those business assets can be stolen, and such trade secret theft is a massive problem worldwide. Such theft is not only often difficult to prove but can involve seeking to enforce the claim abroad in jurisdictions that are either corrupt or inefficient and not inclined to protect property owned by a United States entity.
Amazon became a world leader by using a single patent to protect the “one click” method of purchase and spent a decade defending the ownership of that type of intellectual property in court. The formula for Coca Cola remains a closely guarded trade secret. The needs and buying history of millions of customers is a business gold mine for the various internet companies which sell such information to their own customers at a tremendous profit. Each time you purchase a product or engage in a transaction the information as to your likes and economic capabilities are entered into a data base available for both the seller and for sale to other sellers. That is a trade secret of tremendous value and one reason you will find similar products popping up on your screen the next time you enter that website…or, more troubling, many other websites.
Back in the 19th Century the British bitterly complained that United States courts would not protect them from trade secret piracy that was rampet in the United States. In those days it was machinery and railroad technology being stolen by Americans from British inventors and companies. Nowadays, it is high tech theft and entertainment media that is often the subject of the theft, but the complaints are the same. While we Americans like to think we were the innovators, during that century the British exceeded the United States in most technological innovation and to their dismay found that American companies would arrive in the market with nearly identical products, obviously stolen from the British owners…but with no United States court willing to protect the British product. Other innovative nations faced the same problem. Germany invented Bayer Aspirin which was promptly stolen and marketed by American competitors. The list is extensive.
In today’s world it is the United States which complains vociferously about such theft occurring in such nations as China, Russia, Iran, Ukraine, etc. And in an effort to protect Unites States innovation, the Federal government passed the Economic Espionage Act of 1996 which makes it a federal crime to engage in theft of trade secrets. Put simply, the culprits can go to prison for such theft.
This article shall briefly outline the provisions of the Economic Espionage Act of 1996 (hereafter “The Act”) and discuss some strategic considerations to consider before seeking to utilize it to protect your secrets.
The Basic Act:
The Act, like many Congressional acts, included a wide range of unrelated provisions in addition to the stated efforts to stop industrial espionage. These other provisions include changes to the insanity defense and the Boys and Girls Clubs. This article shall only consider the provisions of the Act relating to economic espionage.
Key Provisions of the Act:
1. 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
2. The Act made is a federal crime to misappropriate trade secrets and included a conspiracy to use misappropriated trade secrets with the knowledge that the theft will benefit a foreign power. Penalties are for fines up to five hundred thousand dollars (per offense) and up to fifteen years in prison. For entities, the fines can be up to ten million dollars. As discussed below, these penalties were increased in later legislation.
3. The Act also requires forfeiture of any proceeds deriving from the crime.
The remedies in the Act are in addition to the civil relief that may be available to the victim of the crime. It is noteworthy that the Act does not seek to interfere with the civil remedies that are available to private entities and individuals in the civil courts.
It also does not seek to criminalize and lead to federal prosecution of every theft of trade secrets. The Justice Department clarified its policy as to when criminal proceedings would be commenced based on the following factors:
The discretionary factors to be considered in deciding whether to initiate a prosecution under § 1831 or § 1832 include:
(a) the scope of the criminal activity, including evidence of involvement by a foreign government, foreign agent or foreign instrumentality;
(b) the degree of economic injury to the trade secret owner;
(c) the type of trade secret misappropriated;
(d) the effectiveness of available civil remedies; and
(e) the potential deterrent value of the prosecution.
The availability of a civil remedy should not be the only factor considered in evaluating the merits of a referral because the victim of a trade secret theft usually has recourse to a civil action. Thus, if a civil remedy being available would stop prosecution under criminal law, there would be very little criminal prosecution.
The criminal relief, if elected by the Department of Justice, is independent and in addition to any civil relief available. Considering the large cost of civil litigation, it may be the only relief practically available.
That said, the Department of Justice is often overburdened and underfunded and to expect them to prosecute most cases is akin to expecting each District Attorney to prosecute every embezzlement case. The typical reaction of the US Attorney is to suggest that the victim seek civil remedies and to encourage the victim to do so. To convince them to proceed requires careful presentation of the case and evidence and legal counsel should assist in reporting the complaint. Of course, it is possible to proceed with both civil and criminal actions simultaneously, but the criminal action is likely to proceed to conclusion first.
Nevertheless, such prosecutions do exist and are particularly prevalent if a foreign entity or government was somehow responsible.
- In United States v. Lange, the Act was used to protect a victim company that had learned that Lange, a disgruntled former employee, had been offering to sell its secret manufacturing processes to third parties. The company reported Lange to the FBI, and Lange was arrested and subsequently convicted and sentenced to 30 months in prison.
Of key import is to note that the actions of the victim company in protecting its trade secrets was a vital ingredient in the successful prosecution. The case was successful in large part because the company undertook reasonable measures to keep its information secret, including:
- physically securing the trade secrets in question
- limiting the distribution of documentation describing the trade secret
- limiting the number of employees with access to the trade secret
- notifying such employees that they were working with confidential information, and placing warnings on trade secret information
- providing vendors with only partial information of the trade secret, so that it could not be replicated
- The Chung Case. In 2010, former Boeing engineer Dongfan "Greg" Chung was sentenced to 16 years in prison, following the trial conviction under the 1996 Economic Espionage Act. Chung, a native of China, was convicted by the US District Court for the Central District of California of stealing Boeing trade secrets related to the US Space Shuttle program and the Delta IV rocket. He had spent over 30 years providing U.S. aerospace technologies to China. Chung was convicted on charges related to more than 350,000 sensitive documents that were found concealed in crawl spaces underneath his home, including conspiracy to commit economic espionage, six counts of economic espionage to benefit a foreign country, one count of acting as an agent of the People's Republic of China, and one count of making false statements to the FBI. The 15-year sentence was viewed as a life sentence for Chung who was 74 years old. In April 2012, Chung's conviction was upheld by the United States Court of Appeals for the Ninth Circuit. Chung subsequently died in 2020 at age 84 from coronavirus-related complications while incarcerated at the Federal Correctional Complex, Butner.
- Most prosecutions under the Economic Espionage Act have been for violation of Section 1832 (Trade Secret Theft). The first such prosecution was of Daniel and Patrick Worthing, maintenance workers at PPG Industries in Pennsylvania who stole blueprints and diskettes. Both pleaded guilty in early 1997.
- In 2013, § 1831 was amended to increase the maximum fines:
- in the case of individuals, from $500,000 to $5,000,000, and
- in the case of organizations, from $10,000,000 to "the greater of $10,000,000 or 3 times the value of the stolen trade secret to the organization."
Civil Causes of Action:
Perhaps recognizing that the US Attorneys are not able to prosecute all possible actions, Congress soon enlarged both the civil remedies available as well as increasing criminal penalties.
- 18 U.S.C. § 1836(b) was replaced to provide for private civil actions, including (subject to appropriate safeguards) ex parte orders "providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action." Remedies available to the court include the granting of injunctions, awarding of damages (including treble damages in cases of willful and malicious misappropriation) and the awarding of costs in cases where the claim was made in bad faith.
- 18 U.S.C. § 1832(b) was amended to provide for criminal fines to be the greater of $5,000,000 or three times the trade secret's value (including any reproduction costs that the holder of the trade secret has avoided).
- 18 U.S.C. § 1961(1) was amended to include 18 U.S.C. §§ 1831–1832 in the RICO list of predicate offences signifying racketeering activity.
- 18 U.S.C. § 1833 was amended to provide for whistleblower protection for an individual who makes a confidential disclosure to a government official in cases of a suspected violation of the law, or files a sealed document to the court with respect to an antiretaliation lawsuit. As a reinforcing measure, employers are required to include a notice of such immunity in any employment agreement that governs trade secrets and other confidential information
The combination of potential criminal prosecution and civil remedies available were designed to both allow effective relief and to create disincentive for those inclined to engage in economic espionage.
The Practical Problems:
While Congress has provided civil relief, the fact remains that seeking to enforce one’s intellectual property rights against an out of country defendant is difficult, expensive and hard to collect even if one achieves a judgment. The nature of much intellectual property allows a person located abroad, often in nations that do not enforce foreign judgments, to steal the information without coming within United States jurisdiction. While international treaties do exist that allow enforcement in most countries, many nations ignore such treaties or are not signatories. To enforce a judgment in a former Soviet Republic or in China is a difficult and, at times, impossible task.
But that does not mean relief is impossible. Such foreign entities steal the information for economic purposes and the usual markets for such property is within more developed commercially connected jurisdictions and it is there that the judgment can be effectively enforced. One may seek relief against entities who purchased and are utilizing such wrongfully accessed information and the threat of such potential action is often enough to make such entities reluctant to purchase and utilize the property so taken. A key aspect is the criminal sanctions available since once one has a civil judgment a United States Attorney may be more inclined to enforce via criminal prosecution the rights violated and one can seek relief all the way down the supply and use change.
But the wise businessperson will recognize that the best protection is effective proactive efforts to keep such information safe. As noted in the Lang case, cited above, the protective efforts of the victim were essential prerequisites to relief and any business should institute such actions for all information it seeks to protect both to stop the theft and to seek effective relief civilly or in criminal court if necessary.
The statutory criminal and civil framework exists for theoretical relief and certainly any theft of such secrets by a foreign power will be scrutinized closely by the United State Attorney. In the more prosaic world of commercial transactions, the victim may have to obtain its own relief and rigid cost benefit analysis if vital before the courts are utilized. It can be achieved, and the penalties faced by the culprit are truly significant-the key is achieving relief at an affordable and practical cost.
That said, the institution and maintenance of an internal system to protect the information is essential for relief both in court and in the market and a vital aspect of that program is to update it on a continuing and effective basis. An important aspect of that is to ensure that in house personnel are truly vetted on a continuing basis and that the internal security systems are reviewed on a continuing basis. One client instituted an excellent system but became so immersed in seeking outside capital for marketing purposes that he failed to update his system and found that within a year his security had been breached and his information compromised. While he did not encounter his property being used in the market, he still had to make full disclosure to potential investors as to the breach and that, alone, made fund raising next to impossible. “I was selling the eggs while someone had stolen my chicken,” he commented over drinks, and vowed to never make that error again.