Criminal Justice Section
Criminal Justice Magazine
Volume 15, Issue 3
Conflicting Views of the Economic Espionage Act
By Joseph F. Savage, Jr., Matthew A. Martel, and Marc J. Zwillinger
In October 1996, Congress enacted and President Clinton signed into law the Economic Espionage Act of 1996 (EEA). With this act, the federal government moved aggressively to protect American corporations by creating the first national criminal penalty for theft of trade secrets. Motivating this action were claims that various foreign governments had tried to gain access to trade secrets developed and controlled by U.S. companies. Louis Freeh, director of the Federal Bureau of Investigation (FBI), testified that more than 20 foreign countries have directly engaged in economic espionage against American firms of all sizes. The annual estimated costs of such acts by foreign governments and companies are subject to considerable debate, but they are conservatively estimated to exceed $25 billion. Riding a wave of bipartisan support, the act passed easily.
The EEA, however, does not solely involve enforcement against foreign states or companies. Indeed, Congress broadened its scope by including substantial enforcement provisions that apply to domestic trade secret disputes. When the act was passed, Attorney General Janet Reno agreed that all EEA complaints would be approved by the U.S. attorney general or his or her designees until October 2001. Prosecutions are being and will continue to be screened by the Computer Crime and Intellectual Property Section (CCIPS) of the U.S. Department of Justice (DOJ).
In this article, Joseph F. Savage, Jr., and Matthew A. Martel present their perspective of the act from the viewpoint of defense attorneys/advisors to high-tech companies, and Marc J. Zwillinger offers insights gleaned from his time as a prosecutor who has enforced the act. They consider whether statutes that predated the EEA have provided adequate protection to intellectual property, whether the EEA satisfies a "pressing need" for trade secrets protection, and what future enforcement concerns are likely to arise. Practical pointers for those facing EEA issues are noted.
The need for the EEA
Savage & Martel: The EEA is really two distinct laws, one that prohibits foreign governments from stealing trade secrets (18 U.S.C. § 1831), and another that criminalizes domestic trade secret theft (18 U.S.C. § 1832). As a law enforcement tool, the need for the act is questionable, although the law may nevertheless have symbolic importance.
The congressional debates contained dire accounts of foreign governments pilfering America’s trade secrets. Simply put, the EEA was couched in terms of national security; the foreign espionage provisions were first proposed as an amendment to the National Security Act of 1947. Senator Kohl observed:
Since the end of the cold war, our old enemies and our traditional allies have been shifting the focus of their spy apparatus . . . [to] our industrial base. But for too many years, we . . . did not heed these warnings. And we left ourselves vulnerable to the ruthless plundering of our country’s vital information. We did not address this new form of espionage—a version of spying as dangerous to our national well being as any form of classic espionage. Today, that complacency ends.
(142 Cong. Rec. S12,211 (daily ed. Oct. 2, 1996).)
The outcry that "there oughta be a law" was hard to resist, especially since the lobby in support of foreign spying on America is fortunately limited and the FBI had claimed that it had investigations of economic espionage by at least 23 foreign governments. (142 Cong. Rec. H10,461 (daily ed. Sept.17, 1996) (statements of Representative Hyde).) Therefore, the EEA’s foreign economic espionage provision breezed through Congress. Swept along with little notice was section 1832, prohibiting domestic trade secret theft.
Because of this original focus, one might surmise that the DOJ would immediately give priority to enforcement procedures involving foreign spies. Instead, not one prosecution has occurred enforcing the foreign espionage provisions of the EEA. Not a single one. The conclusion seems inescapable: The foreign economic espionage law either was not necessary or there is a real and ongoing problem that is not being addressed.
While the lack of section 1831 prosecutions suggests that the EEA is unnecessary, section 1832, the domestic trade secret theft provision, has been used 24 times, suggesting that the EEA is needed. Sixteen cases have resulted in convictions, seven are pending, and one has been dismissed. Yet, when actual prosecutions are examined, only about one-half of the cases involved solely EEA charges. And, of these, all but one involved plea bargains where another federal statute was violated. Thus, it seems the EEA is of little practical necessity. Nonetheless, defendants are more likely to face EEA charges and businesses are now exposed to prosecution for hiring practices, joint venture activity, or other routine trade secret disputes. At most, the law makes life easier for federal prosecutors, which might not be objectionable if it did not pose risks for everyone else.
Perhaps the necessity for the statute can be established by identifying theoretical gaps in existing law. Proponents cite the inadequacy of the fraud and stolen property statutes.
First, they say, theft of trade secrets is not reached by the mail or wire fraud statutes, 18 U.S.C. §§ 1341 and 1343, under circumstances where the theft does not involve a mailing or a wire transmission. And, second, the Interstate Transportation of Stolen Property Act (ITSP, but also commonly referred to as the NSPA ), 18 U.S.C. § 2314, is limited to crimes including the theft of tangible property. ( United States v. Brown, 925 F.2d 1301 (10th Cir. 1991).)
It is true that mail and wire fraud will not reach trade secret thefts that do not satisfy the jurisdictional requirement. (18 U.S.C. §§ 1341 and 1343.) But the statutes also do not reach frauds that fail to meet the jurisdictional requirement. Why is theft sufficiently more significant than fraud, warranting a law removing jurisdictional prerequisites? Why not enact an equally broad Economic Fraud Act?
If the "tangible property" limitation of the NSPA creates a serious dilemma for law enforcement, it could be addressed by simple amendment, as Congress did with the mail and wire fraud statutes in 18 U.S.C. § 1346, to reach certain intangible property. Instead, the EEA includes intangible property but then eliminates the $5,000 minimum loss requirement in the NSPA.
Finally, the EEA cannot be justified on the basis that civil remedies are inadequate. The legislative history mentions that civil remedies cannot safeguard America’s intellectual property but cites no data to support that conclusion.
Zwillinger: The passage of the EEA signified Congress’s recognition that a corporation’s most valuable assets reside neither in its currency reserves nor its physical equipment but in the trade secrets that fuel its sales and growth. In the 24 EEA cases charged to date, the trade secrets involved sometimes have included information developed at great cost by leading U.S. companies, such as the formula for Taxol, an anticancer drug developed by Bristol-Meyers Squibb, and a next-generation computer processor created by Intel. More often, these cases have involved the secrets of lesser known companies of various sizes, such as RAPCO, Varian Corp., IDEXX, Joy Manufacturing, Semi Supply, and Solar Turbines, companies whose economic livelihood is increasingly dependent upon protection of proprietary information. Although these corporations could likely recover from thefts of physical equipment or cash, the unauthorized disclosure of their top secret technology may well be catastrophic events with long-term effects on the U.S. economy. As Senator Specter observed during the legislative discussions of the act:
Inventing new and better technologies, production methods, and the like, can be expensive. American companies and the U.S. Government spend billions on research and development. The benefits reaped from these expenditures can easily come to nothing, however, if a competitor can simply steal the trade secret without expending the development costs. While prices may be reduced, ultimately the incentives for new invention disappear, along with jobs, capital investment, and everything else that keeps our economy strong.
(142 Cong. Rec. S12,207–08 (daily ed. Oct. 2, 1996) (statements of Senator Specter).)
Trade secrets belonging to American companies have been surreptitiously removed from offices in envelopes, on disks, or by means of phone lines for quite some time now. The role of law enforcement in investigating and prosecuting the theft of such information is no less important than in prosecuting individuals or corporations who steal in more traditional ways or who embezzle or defraud corporations of their more liquid assets.
The criticism that the DOJ’s enforcement record has been limited to bringing charges under section 1832 and not section 1831 is misplaced. From the victim’s perspective, it makes little difference whether its confidential and valuable information is being transferred to a competing corporation in the United States or in Taiwan, rather than to a foreign government. In fact, theft of trade secret information by a foreign corporation, prosecuted under section 1832, is often the most problematic because it allows a foreign corporation to gain an unfair advantage in highly competitive markets that often provide few legal protections to U.S. corporations. Thus, if trade secret information is stolen by a foreign corporation that does no business in the United States, no civil enforcement mechanism is likely to be sufficiently potent to prevent the foreign corporation from profiting from its ill-gotten gains.
Moreover, highly competitive trade secret information can be and has been exploited by both foreign and domestic competitors even without the political and economic clout of a foreign government. In fact, in one "domestic" case, the defendant used stolen trade secrets to manufacture products that were illegally provided to an agent of the government of Iran. ( United States v. Shearer, C.A. No. 3:99cr00433 (N.D. Tex.).) The fact that the prosecution was brought under section 1832, rather than section 1831, does not alter the fact that a foreign instrumentality benefited from the crime. Similarly, virtually none of the harms cited in the legislative history of the statute occur only when a foreign government is directly involved in the theft. A U.S. corporation whose trade secrets are stolen and used competitively against it by anyone still suffers a potential loss of incentive to conduct research and development, a possible need for a workforce reduction, and diminished capital investment.
The fact that the victim often has potential civil remedies does not make the need for federal criminal prosecution less pressing. As a practical matter, in most theft, fraud, and embezzlement cases, the victim has a civil remedy under either state or federal law. Yet no one—not even defense counsel Savage and Martel—seriously questions the role of law enforcement in investigating and prosecuting such cases, especially when expensive physical assets are taken or significant funds are embezzled. In light of the fact that corporate trade secrets are often more valuable than cash, can be carried away on a CD-ROM, or transferred via e-mail in the blink of an eye and may never be recovered, the suggestion that the government should neither seek to punish the wrongdoers nor deter others from similar conduct is misguided. The multitude of criminal referrals to the government in the past three years suggests that the vast majority of victim corporations do not share Savage’s and Martel’s unease with the government’s role in these matters.
Furthermore, Savage’s and Martel’s suggestion that the current EEA cases demonstrate that there is little practical necessity for the law is unsound. As a factual matter, the information put at risk or stolen in the 24 EEA cases can be conservatively valued at greater than $200 million. In the majority of these cases, the theft of proprietary information would not have been properly captured by existing statutes absent the passage of the EEA, and the violators would have gone unpunished. In fact, in half of the 24 cases, EEA violations were the only federal charges levied, undercutting Savage’s and Martel’s speculation that other federal statutes would apply. For example, in a recent sentencing under the EEA, Jack Shearer pled guilty to stealing trade secret design information belonging to Solar Turbines and using those secrets to manufacture competing products that were placed in the stream of commerce. At sentencing, Shearer was ordered to serve 4.5 years in prison and pay over $7 million in restitution to the victim. This theft would not have been adequately punished without the EEA.
Finally, shoehorning thefts of trade secrets into criminal prohibitions designed to prevent different conduct could require years of protracted litigation with no certain outcome, drastically reducing the deterrence value of federal criminal law. ( United States v. Brown, 925 F.2d 1301 (10th Cir. 1991) (holding that theft of pure intellectual property is not actionable under the NSPA).) As a philosophical matter, to the extent that prosecutors and defense attorneys have genuine concerns over the threat posed by expanding federal criminal law, that threat is significantly greater when old statutes are extended beyond their originally conceived limits than when new statutes targeted at specific criminal conduct are properly applied.
Drafted language issues
Savage & Martel: Section 1832 is unnecessarily broad, poorly worded, and confusing. For example, the EEA’s definition of "trade secrets" is broader than the Uniform Trade Secrets Act (UTSA), which in most states provides victims of trade secret theft with a private cause of action. The EEA defines a trade secret as "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. . . ." (18 U.S.C. § 1839(3).) The UTSA is limited to "[i]nformation, including a formula, pattern, compilation, program, device, method, technique, or process. . . ." (UTSA § 1(4).) Thus, under the EEA, a defendant that could not be sued for keeping a former employer’s business or marketing plan is subject to criminal liability.
Furthermore, under the UTSA a trade secret is only information that is not generally known to, or ascertainable by, those in the victim’s industry (UTSA § 1(4)(i)), while under the EEA the information only needs to be unknown to, or unascertainable by, the "general public." (18 U.S.C. § 1839(3)(B).) Again, the scope of criminal liability exceeds civil remedies. A competitor lacking a civil remedy may now seek out a prosecutor to impose draconian penalties and obtain "restitution" for conduct that would not expose the defendant to even civil liability. The DOJ’s response to this is to say "trust us."
Zwillinger: Although the EEA definition of trade secrets is broad, the possibility raised by Savage and Martel—that a defendant could be found criminally liable for conduct that would not give rise to civil liability—is unrealistic. First, the UTSA has been held to apply to broad types of business and marketing data under the definition of "information," notwithstanding the fact that business data are not specifically itemized in the act. ( See MaiSystems Corp. v. Peak Computer, Inc., 991 F.2d 511, 521 (9th Cir. 1993).) In fact, the UTSA protection extends far enough to cover customer lists in circumstances where the nature of the particular industry is such that customers are not known, potential customers can only be discovered by extraordinary efforts, and the list has been developed through a substantial expenditure of time and money. ( See, e.g., Electro Optical Indus., Inc. v. White, 76 Cal. App. 4th 653, 685 (1999).) Thus, the definition section of the EEA merely clarifies that it covers the same broad categories of information already deemed to be within the purview of the UTSA.
Second, to the extent that business information would not qualify as a trade secret under the UTSA, it would also likely fail under the EEA, not because it constitutes a type of information excluded from the EEA’s definition of a trade secret, but because it would lack other necessary attributes, such as the owner’s failure to take reasonable measures to secure the information (as with customer lists or marketing information disseminated to third parties), or because the information does not "derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public." (18 U.S.C. § 1839.) Finally, the fact that the government has to prove beyond a reasonable doubt that a defendant knew or believed that the misappropriated information was a trade secret will prevent the breadth of the EEA from becoming unwieldy. If information would not be considered a trade secret under the UTSA, the government will be hard-pressed to prove that the defendant knew or believed the information was a trade secret. Rather than seek to extend criminal liability to conduct at the edge of civil liability, it is far more likely that busy federal prosecutors will continue to encourage companies to pursue their own civil remedies in cases involving thefts of hard-to-value business information where the defendant’s conduct is neither repetitive nor egregious.
Products versus services
Savage & Martel: Congress criminalized only the theft of trade secrets "related to or included in a product." (18 U.S.C. § 1832(a) (emphasis added).) This is bizarre when the
[m]ajor problem for law enforcement in responding to the increase in such thefts has been a glaring gap in Federal Law. For many years, the United States has had a variety of theft statutes in the United States Code. . . . For example, it violates Federal law to move stolen property across state lines. In order to violate such laws, however, the courts have held that the property stolen cannot be intangible property, such as trade secrets or intellectual property.
(142 Cong. Rec. S12,208 (daily ed. Oct. 2, 1996) (statements of Senator Specter) (emphasis added).)
Congress failed to create comprehensive legislation criminalizing the theft of all trade secrets; it is still not a crime to steal trade secrets that relate to intangible items such as services. This limitation is inconsistent with legislative intent and creates an ambiguity when the trade secret is (1) research not yet tied to a particular product, (2) marketing-type information such as customer lists, or (3) relates to a service.
The DOJ is already circumventing the "product" limitation. In United States v. Camp, C.A. No. 2:98cr00048 (D. Me.), United States v. Campbell, C.A. No. 1:98cr59 (N.D. Ga.), and United States v. Chang, C.A. No. 99cr00304 (N.D. Cal.), marketing plans were charged as the trade secret, while in Trujillo-Cohen, C.A. No. 4:97cr00251 (S.D. Tex.), it was computer software that the victim had created for use in its own business. None of these items was directly product- related.
Although the legislative history limiting the statute to theft of something more than "general skills" somewhat narrows the act’s scope, it does nothing to illuminate the product/nonproduct distinction because general skill and knowledge could relate to a product, service, or neither. Thus, contrary to Zwillinger’s assertion, that bit of legislative history is not a useful guide in understanding what trade secrets are protected under the statute nor a justification for the DOJ’s decisions.
Zwillinger: The government already has declined several EEA cases in which the stolen information did not relate to a product produced for or placed in interstate or foreign commerce and no other federal criminal charges were applicable. The product requirement encompasses two issues: that the trade secret be related to a product, and that the product be produced for or placed in interstate or foreign commerce. The second requirement appears to be designed to justify federal jurisdiction and can be satisfied in most cases. For example, where information about the design of a product actually being manufactured and sold is stolen, this element would be established by evidence of interstate sales. Where the stolen information is research and development for a potential product, the victim’s stated intent to sell the eventual product worldwide should be sufficient.
The more troublesome aspect of the product requirement is the implied distinction it draws between products and services. Savage and Martel are correct that it seems inconsistent with the goals of the legislation to protect only these trade secrets relating to products. To the extent that a nonprofit organization is researching the cure for a certain disease, a theft of the nonprofit’s research may not be covered by the EEA unless the government could show that the researchers planned to develop a vaccine or treatment. If such valuable research is not protected by the EEA, however, the statute has failed to fulfill its objective.
The term "product" appears to exclude technical skills and other know-how not embodied in a saleable, transportable good. Distinguishing between a product and a pure service, however, can be tricky. An example of a pure service might be the work of an individual chiropractor who has developed a secret technique for manipulating a patient’s spine to reduce back pain. If no evidence exists that the chiropractor intended to develop a medical product using this secret, but merely used it in private practice, the theft of this technique would probably not violate the terms of the EEA. Similarly, the theft of an advance copy of a lawyer’s legal brief by a corporate adversary also seems beyond the purview of the statute. On the other hand, many so-called services are packaged and sold much like products. For example, the product of a cellular telephone company may be a package consisting of 600 minutes of airtime per month, caller ID, voice mail, paging and messaging, and a "free" telephone. If a cellular telephone company developed a trade secret relating to its cellular network, it is certainly possible that the trade secret would sufficiently relate to a product to allow the thief to be charged under the EEA.
One reasonable explanation for the product requirement that informs its interpretation is the section of the legislative history indicating that the EEA is not designed to apply "to innocent innovators or to individuals who seek to capitalize on their lawfully developed knowledge skill or abilities."
A prosecution under this statute must establish a particular piece of information that a person has stolen or misappropriated. It is not enough to say that a person has accumulated experience and knowledge during the course of his or her employ. Nor can a person be prosecuted on the basis of an assertion that he or she was merely exposed to a trade secret while employed. A prosecution that attempts to tie skill and experience to a particular trade secret should not succeed unless it can show that the particular material was stolen or misappropriated. Thus, the government cannot prosecute an individual for taking advantage of the general knowledge and skills or experience that he or she obtains or comes by during his tenure with a company.
(142 Cong. Rec. S12,213 (daily ed. Oct. 24, 1996) (manager’s statement for H.R. 3723).)
Although the product requirement is not explicitly mentioned in this discussion, the passage supports the notion that Congress was mainly trying to ensure that skill, as opposed to a particular proprietary piece of information, should not form the basis of a prosecution.
Where Savage and Martel go astray, however, is in their suggestion that the cases already prosecuted involving the theft of business information reflect an attempt by the DOJ to expand the product requirement. Although the information that is the basis for a prosecution must be related to a product produced for or placed in interstate commerce, the stolen information itself does not have to be integral to that product. Accordingly, prosecutions based on trade secret business information relating to sales of newspapers or ladders do not expand the product/service distinction.
Protecting trade secrets
Zwillinger: Victims of trade secret thefts are faced with a dilemma when deciding whether to report the matter to law enforcement. Generally, victims are concerned that if they report the matter, the trade secret will be disclosed during discovery and/or during the criminal trial. In drafting the EEA, Congress recognized this issue and sought to preserve the confidentiality of trade secrets throughout the prosecution.
Although courts have traditionally had authority to enter protective orders under the All Writs Act, the specific exhortation in 18 U.S.C. § 1835 for courts to enter such orders and take other action as may be necessary and appropriate to preserve the confidentiality of trade secrets consistent with the requirements of the Federal Rules of Criminal and Civil Procedure has been invoked by the DOJ to justify protective orders in at least five EEA cases thus far. Most notably, in United States v. Hsu, the United States relied on 18 U.S.C. § 1835 to appeal the district court’s decision ordering the government to turn over to the defendants the trade secrets that were the subject of the attempt and conspiracy charges under the EEA. On appeal, the Third Circuit reversed the district court’s order, ruling that in an attempt case the government need not prove that the materials at issue are actually trade secrets as long as the government proves that the defendant believed that they were. ( United States v. Hsu, 155 F.3d 189, 194, 198 (3d Cir. 1998).)
This important precedent was subsequently followed in United States v. Yang, 1999 U.S. Dist. LEXIS 7130 (N.D. Ohio Mar. 18, 1999).
Accordingly, where a defendant has been charged with attempting or conspiring to violate the EEA, the government need not turn over actual trade secrets to the defense if it can meet its burden of proof without reference to the alleged trade secrets. This ruling encourages corporations to involve the government early in an investigation to allow the government, where appropriate, to run sting operations in which it substitutes fictitious information for actual trade secrets, reducing any risk that valuable trade secret information will need to be disclosed during the course of an investigation.
The question remains whether disclosure of trade secrets will be required in a case charging a completed theft of trade secrets rather than attempt and conspiracy. As a practical matter, the question is less important because in most completed offense cases the defendant has possessed the trade secrets, at least for some period of time, and knows the information contained therein. But even assuming this disclosure would be required, section 1835 directs courts to take actions necessary to prevent further disclosure of trade secrets to third parties or to the general public. This can be accomplished through standard measures such as protective orders and sealed exhibits, but judicious use of new technology offers other possibilities. For example, exhibits no longer need be displayed to the entire courtroom to elicit dramatic testimony about the documents. Rather, through the use of wired courtrooms, trade secret documents can be effectively displayed on video screens to judges, juries, and witnesses without disclosing them to the general public, as was done in Yang. More traditional measures, such as sealing courtrooms for the testimony of specific witnesses, were also successfully employed at the sentencing stage of the prosecution in United States v. Hallstead, C.A. No. 4:98cr00041 (E.D. Tex.) to protect confidential information concerning research and development costs.
Although the risk that a defendant or his or her agents will violate the terms of a protective order or obtain access to new trade secret information in the course of a prosecution cannot be completely eliminated, the government’s enforcement record and its willingness to use creative measures to protect the victim’s confidential information suggest that the fear of trade secret disclosure should not be a significant reason to avoid reporting theft of trade secret information to law enforcement.
Savage & Martel: Congress authorized courts to enter protective orders to ensure that businesses were not twice victimized by disclosing trade secrets to those who attempted to steal them. (18 U.S.C. § 1835.) The provision looks straightforward, but it is not.
The Hsu case illustrates the issues. Although the Third Circuit ordered that the victim’s trade secrets not be disclosed to the defendants accused of attempted theft, the court did not decide whether the trade secrets must be disclosed to defendants accused of actual theft of trade secrets or the extent to which the Federal Rules of Criminal Procedure or the Constitution may independently mandate disclosure. ( Hsu, 155 F.3d at 197, 205–06.) Another troublesome issue arises in cases where some coconspirators received the actual trade secrets taken by others. Will the court authorize disclosure of information to some defendants and not others? Thus, section 1835’s provisions, the good intentions of the U.S. attorney general’s office, and the discretion of the court do not put to rest victims’ concerns.
Precipitately bringing a matter to the attention of investigators runs the risk of the cure being worse than the disease.
Current, future enforcement issues: Government-industry relationships
Zwillinger: In United States v. Yang, the court imposed a significant downward departure at the time of sentencing on the ground that the government had formed an excessively close relationship with the victim. (This aspect of sentencing is being appealed by the government.) The implications of this departure on future EEA investigations and prosecutions are quite troubling. As background, in addition to the two EEA counts on which the defendants were convicted, Yang also involved allegations that the defendants engaged in an eight-year scheme to defraud Avery Dennison of its confidential and proprietary information. To execute that scheme, the defendants paid Victor Lee, an Avery Dennison employee, to provide the defendants with confidential information about technological developments at Avery Dennison.
At sentencing, the court specifically found that the government had proven that the "defendants were engaged in a scheme or artifice to defraud the Avery Dennison Corporation of its confidential and proprietary information which included approximately sixty adhesive formulas." ( Yang, sentencing hearing transcript, at 4.) The court also concluded that although the government had not produced evidence of the value of all 60 stolen adhesive formulas, the government had demonstrated that one of the stolen formulas cost Avery more than $850,000 to develop. ( Id. at 6.) Rather than sentence the defendants based on the value of the formula, however, the court departed downward on the basis that, in its view, "Avery-Dennison has been an active participant and at times even manipulated the presentation of the Government’s case." ( Id. at 27.)
If not overturned on appeal, this decision may have profoundly negative consequences on the government’s EEA enforcement efforts. Unlike many traditional crimes, EEA cases require the government to work closely with the victim throughout the investigation and prosecution for several reasons. First, the government must prove that the victim took reasonable measures to protect the trade secret and that the owner derived independent economic value from the fact that the information was not generally known to, or reasonably ascertainable by, the general public. (18 U.S.C. § 1839.) The information necessary to establish these elements is often uniquely within the victim’s control. Second, the government will be required to prove the value of the trade secret at sentencing, including either the victim’s research and development costs or the amount it would cost to license the technology in a voluntary transaction—or both. Without working closely with the victim, at least in conjunction with outside experts, establishing these elements would be nearly impossible.
Third, of the 24 EEA cases, 18 have involved the participation of a former employee of the victim company. Therefore, to prosecute the case properly and to anticipate possible defenses, prosecutors need to have as thorough an understanding of the victim company’s business and operations as the defendant or his coconspirators. Finally, the government needs to be sensitive to the protection of the victim’s trade secrets throughout the prosecution to avoid exacerbating the disclosure of trade secrets that the statute is designed to prevent. Thus, consultation throughout the trial proceedings is necessary to ensure that the victim’s trade secrets are not unnecessarily exposed.
Obviously, victims that also intend to sue an EEA defendant have incentives to see that the government’s prosecution is successful. (Because the government will nearly always ask the victim to stay any civil action until the conclusion of the criminal investigation and prosecution, victims will be even more interested in watching the criminal prosecution unfold to determine whether a separate civil action is worthwhile.) This incentive, however, is no different than a victim’s incentive to see the government succeed in any case, especially where the victim is entitled to receive restitution. To allow a defendant to escape serious punishment on the ground that the government has worked too closely with a victim not only provides an unjust windfall to the defendant, but makes the investigation and prosecution of future cases unnecessarily difficult. This ruling seems especially inappropriate given that the attorney general was required by the Congress to develop guidelines for treatment of crime victims and witnesses "in order to obtain the views of the victim or family about the disposition of any federal criminal case brought as a result of such crime, including the views of the victim or family about: (A) dismissal; (B) release of the accused pending judicial proceedings; (C) plea negotiations; and (D) pretrial diversion program." (18 U.S.C. § 1512, historical note.)
It is entirely correct to note that the majority of the prosecutions brought thus far by the DOJ have involved the participation of an employee or a former employee of the victim company. Rather than reflecting a penchant for beating up on the little guy for the benefit of big corporations (as Savage and Martel suggest below), this reflects the reality of modern-day corporate security: The biggest risk is still the insider. Indeed, in three of these insider cases— Yang, Shearer, and United States v. Krumrei, C.A. No. 2:98cr80943 (E.D. Mich.)—the former employee attempted to exploit or exploited the stolen trade secrets for the benefit of a foreign corporation or government. Expecting that insiders will continue to play a prominent role in EEA cases, regardless of whether they are acting for themselves or for a foreign entity, is certainly reasonable.
Savage & Martel: Recognizing that the EEA had a real potential for harm, Congress obtained a promise from the attorney general that the DOJ would carefully monitor itself and that all EEA prosecutions would be subject to top-tier approval until October 2001. (142 Cong. Rec. S12,214 (daily ed. Oct. 2, 1996) (letter of Attorney General Janet Reno).) After that date, of course, all bets are off. Even now, however, the Yang case shows that the statute can be abused by American businesses. Excessive government entanglement with the victim causes severe harm to the defendant that is unrelated to law enforcement purposes.
Surely, the alleged victim must participate. The victim possesses information essential to a conviction: The victim’s conduct in protecting trade secrets and intended harm to the victim are elements of the offense that uniquely require victim cooperation. However, in EEA cases, victims’ "cooperation" often goes well beyond this level since they often are direct competitors of the defendants, with much to gain by using the prosecution as a "tool."
Again, Yang demonstrates the dangers. The victim, Avery Dennison, is one of the largest adhesive manufacturers in the world. The corporate defendant, Four Pillars, was insignificant. Avery Dennison actively participated in and "even manipulated the presentation of the government’s case." ( Yang, sentencing hearing transcript, at 27–28 (emphasis added).) It also shared its loss evaluation experts with the government. These actions were motivated by a desire to improve its civil case, where Avery could use the conviction to recover substantial damages that easily could put Four Pillars out of business—the corporate death penalty. ( Id.)
To date, the DOJ has been quick to invoke the EEA to protect large corporations against small competitors or individuals. To name just a few, the DOJ has come to the rescue of Bristol-Meyers, Gillette, Deloitte-Touche, Pittsburgh Plate Glass, IBM, and Intel (twice), companies fully capable of pursuing their rights in civil proceedings against the alleged thieves. The EEA’s legislative history did not identify the protection of large corporations from its low-level employees—e.g., in the Pittsburgh Plate Glass case, the trade secrets were taken by the janitor and his brother—as an important unaddressed social problem. As Judge Economus noted in Yang, some victims may use the EEA "to seek vengeance instead of a pursuit of justice." ( Id. at 28–29.)
Inevitable disclosure doctrine
Savage & Martel: The legal doctrine of trade secret theft by inevitable disclosure permits an employer to enjoin a departing employee from working for a competitor upon proof that the departing employee may disclose the former employer’s trade secrets. ( See James Pooley, Trade Secrets § 7.02(2) (Law Journal Press 1999).) This doctrine, in conjunction with section 1832’s broad provisions, raises the specter that the movement of an employee from one competitor to another can trigger a criminal prosecution. There is no legal reason this growing civil doctrine cannot be imported directly into criminal prosecutions at the DOJ’s discretion. As a consequence, use of the EEA is likely to have a chilling effect on employee mobility.
Zwillinger: As to the possible invocation of the civil inevitable disclosure doctrine, this concern is much ado about nothing. Even after the DOJ approval requirement lapses in October 2001, federal prosecutors will not and cannot invoke expansive theories of civil trade secret liability to extend the EEA beyond its moorings. To establish that a defendant violated the EEA, the government must prove that a defendant knowingly misappropriated or attempted to misappropriate trade secrets for the economic benefit of someone besides the rightful owner.
Although the inevitable disclosure doctrine may justify the entry of an injunction under a civil standard, it will not suffice to establish all of the elements of a theft beyond a reasonable doubt. If a prosecutor attempted to base an EEA prosecution on such a theory, it is extremely unlikely that such a charge would survive a Rule 29 motion for judgment of acquittal because one or more of the essential elements of the crime would be lacking. In addition, the legislative history of the EEA specifically refutes the notion that a prosecution can be based on any theory of inevitable disclosure: "Nor can a person be prosecuted on the basis of an assertion that he or she was merely exposed to a trade secret while employed." (142 Cong. Rec. S12,213 (daily ed. Oct. 2, 1996) (manager’s statement for H.R. 3723).)
Consequences of conviction
Editor’s note: The authors agree that a defendant facing sentencing under the EEA cannot yet predict how the stolen trade secret information will be valued.
EEA cases will be driven by the value of the misappropriated property involving complicated testimony of fact and expert witnesses. The sentencing guideline applicable to 18 U.S.C. §§ 1831 and 1832 is section 2B1.1, the generic guideline for theft cases that specifies a base offense level, which is increased if the theft benefited a foreign government, or involved more than minimal planning. (U.S. Sentencing Guidelines Manual § 2B1.1(a), (b)(7).) The court must then determine the "loss," which is defined as the "fair market value of the property taken, damaged, or destroyed." ( Id. at application note 2.)
Determining the market value of trade secrets in civil cases is a long-standing challenge, with courts afforded broad latitude. One common method is to calculate license fees typically paid for the stolen technology, oftentimes called the "reasonable royalty" approach. Another method is to determine what it would have cost the defendants to have developed the information independently, which frequently means matching the victim’s research and development costs. This "replacement cost" method is implicitly endorsed by section 2B1.1 application note 2, where the market value is otherwise difficult to ascertain. A third technique is to use the price that the thief was able to realize on the open market for the trade secret.
In addition to loss, the Mandatory Victims Restitution Act of 1996 (MVRA), 18 U.S.C. § 3663A, requires restitution for any "offense against property, including any offense committed by fraud and deceit," and "in which an identifiable victim or victims has suffered a physical injury or pecuniary loss." (See 18 U.S.C. § 3663A(c)(1)(A)(ii) & (B).) For cases specifically involving "damage to or loss or destruction of property of a victim of the offense," the MVRA requires that the defendant return the property to its owner, or if return of the property is "impossible, impracticable, or inadequate," pay an amount equal to the greater of the value of the property on the date of its damage, destruction, or loss, or its value at the time of sentencing, less the value of any part of the property that is returned. (See 18 U.S.C. § 3663A(b)(1).) It is not yet settled whether the MVRA applies in EEA cases, although the government has successfully sought and obtained restitution.
Zwillinger: The government often takes the position that the "thief’s market price" understates the value of stolen property. In fact, the government successfully opposed this measure of damages for EEA cases in Hallstead. A "reasonable royalty" measure most accurately represents the benefit the defendant gained because the defendant would have had to pay that amount to obtain the secrets legitimately. ( See Vitor Corp. of Am. v. Hall Chemical Co., 292 F.2d 678, 683 (6th Cir. 1961); Unif. Trade Secret Act § 3(a).) In cases where no reasonable royalty is readily ascertainable, however, this approach may unduly complicate sentencing. Then, the best alternative is the "replacement cost" measure, which has been used in civil trade secret cases and criminal mail fraud cases. ( See, e.g., Salsbury Labs., Inc. v. Merieux Labs., Inc., 908 F.2d 706, 714 (11th Cir. 1990); United States v. Wilson, 900 F.2d 1350 (9th Cir. 1990).) Replacement cost is often not easy to calculate. The most probable measure of replacement cost is the amount that the victim originally spent to develop the technology. Although current replacement costs may be less than the victim’s historical expenditures, other methods are likely to be unduly speculative. In both Hallstead and Yang, two EEA cases that involved contested sentencing hearings on loss, courts used some variation of the victim’s research and development costs to measure loss.
Savage & Martel: Because section 2B1.1 serves as the generic sentencing guideline for most federal theft offenses, it is unclear whether a defendant convicted under the EEA will receive a sentence under section 2B1.1 that is proportionate to the crime committed, based on the "fair market value of the property taken, damaged, or destroyed." (U.S.S.G. § 2B1.1, application note 2.) As an initial matter, it is quite unlikely that the victim’s research and development costs are a reasonable proxy for replacement costs. If a company spends years developing a secret that, due to the advent of more modern technology, could now be developed in three months, the amount spent by the victim is largely irrelevant and would result in an inappropriate sentence.
Furthermore, unless the technology has been widely disseminated, the secret still has some residual value for the victim. Trying to determine a reasonable royalty for the stolen technology would be even more speculative. Even the thief’s market price, which would be the lowest of the three measures, could still result in disproportionate sentencing. For example, in Yang the government failed to prove the fair market value or research and development costs of all but one of the dozens of trade secrets stolen by the defendants, but still the defendants would have received lengthy sentences if not for the downward departure. Thus, as Yang demonstrates, it is by no means clear that section 2B1.1 is an appropriate fit for defendants sentenced under the EEA.
Views on the enforcement of the EEA are directly related to the perspective of the observer. For victims and the government, the EEA provides a needed enforcement mechanism to deter and punish the theft of proprietary information. For defense counsel and companies concerned that their ability to compete will be chilled by the uncertainties of an overbroad statute subject to abuse, the risks of EEA enforcement may outweigh its benefits. Nonetheless, all would agree that excessively aggressive enforcement can be detrimental, while undue caution will leave a potentially serious economic problem to continue unabated.
Joseph F. Savage, Jr., a former federal prosecutor, is a partner at the Boston firm of Testa, Hurwitz & Thibeault, L.L.P., specializing in complex business litigation and white collar criminal defense. Matthew A. Martel is an associate with the same firm. Marc J. Zwillinger is a partner in the Washington, D.C., office of Kirkland & Ellis, specializing in cyberlaw and information security. For the preceding three years, Zwillinger was a trial attorney with the CCIPS of the U.S. Department of Justice during which time he made recommendations to the assistant attorney general of the Criminal Division regarding the approval of EEA prosecutions and was one of the prosecutors in United States v. Yang , the first EEA case to be tried. He would like to acknowledge David Green and Christian Genetski for contributions to this article.