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This Article was Originally Published in

North Carolina Lawyers Weekly

, March 13, 2006

The Economic Espionage Act – Is It Finally Catching On?

by Press Millen & Todd Sullivan

The drumbeat is still faint, but might be getting steadier.

In Ohio, a former employee of a

hydraulic gear pump manufacturer pleads guilty to selling his former employer’s trade secrets to

a South African competitor.

Last month, a Connecticut man received two years in federal prison

for stealing the source code for Microsoft’s Windows NT 4.0 and Windows 2000 and then

offering to sell it on the Internet.

An FBI sting operation nabbed him.

An executive of a

California company pleads guilty to taking his former company’s engineering notes in hopes that

it will boost his success in his new job.

The Economic Espionage Act

In each case the prosecutions proceeded in federal court under the Economic Espionage Act, 18

U.S.C. § 1831,

et seq.

(the “EEA”), a federal law passed in 1996 to facilitate criminal

prosecutions for theft of trade secrets.

The EEA created two related crimes.

The first, set forth in 18 U.S.C. § 1831, created a new

federal crime for stealing trade secrets for the benefit of foreign governments, instrumentalities

and agents.

The new crime recognized that in the post-Cold War world, competition between the

United States and its enemies was no longer just ideological but now contained a significant

economic element.

Under the statute, violators can be imprisoned for up to 15 years and receive

fines of up to $500,000.

Organizations committing offenses can be fined up to $10 million.

The second new crime under the EEA does not require that the theft of the trade secrets have a

foreign connection.

Instead, any attempt to convert a trade secret “related to or included in a

product that is produced for or placed in interstate or foreign commerce” that injures the owner

of the trade secret is a crime punishable by up to ten years in prison.

18 U.S.C. § 1832 (a).

Fines for organizations committing this crime can range as high as $5 million.

In addition to fines and imprisonment, the EEA provides for criminal forfeiture of any property

“constituting or derived from” any violation or proceeds of the violation.

Companies who hire

persons in order to get improper access to another company’s trade secrets can find themselves

criminally liable under the EEA and subject to the significant consequences of federal

prosecution.

CLIENT ALERT

March 13, 2006

Under the EEA, trade secrets are defined in a manner at least as broad as the definition of trade

secrets found in statutory regimes enacted under state laws based on the Uniform Trade Secrets

Act.

A “trade secret,” as defined by the EEA, “means all forms and types of financial, business,

scientific, technical, economic, or engineering information,” so long as the owner has taken

reasonable measures to keep the information secret and the information derives independent

economic value “from not being generally known to, and not being readily ascertainable through

proper means by, the public.”

18 U.S.C. § 1839(1).

The EEA has the potential to be a powerful tool in protecting the trade secrets of American

companies.

After a decade on the books, though, is it fulfilling that role?

EEA Prosecutions

The United States Department of Justice has recently published new cybercrime statistics

detailing prosecutions under the EEA.

From 2000 through the end of 2005, federal prosecutors

brought 34 cases under the EEA.

Of that number, nearly half (15) were filed in the Northern

District of California, home to Silicon Valley.

That's five times the number of the next most

prolific district, the Southern District of New York with only three cases.

Only three other

districts – the Western District of New York, the Southern District of Florida, and the Central

District of California – had multiple cases (two each) over the six-year period.

Nine districts had

one case each.

Thus, the Justice Department statistics show that 86 federal judicial districts – over four-fifths of

the districts in the county – had

no

EEA prosecutions during the period.

No prosecutions were

brought in the three North Carolina districts.

While in some cases businesses in those districts

might not have had many trade secrets worth stealing, it's more likely that prosecutors simply

weren't comfortable proceeding under a relatively novel federal statute.

Similarly, many

businesses (and their attorneys) might not even be aware of the existence of a federal statute

designed to protect their trade secrets.

Surely, an economy as advanced as North Carolina’s has

trade secrets not only worth stealing, but has trade secrets that have been stolen.

More Details on the Prosecutions

The Justice Department data also describes the categories of trade secrets at issue in the criminal

cases that the government has brought.

The range of trade secrets is wide.

As noted above, it

includes things like source code for software and engineering drawings and blueprints.

It also

includes more unusual trade secrets such as genetic screening discoveries, DNA cell lines, and

drug delivery formulas.

Perhaps most interesting are the various categories of internal company

competitive information that have been the subject of prosecutions.

These include customer

information, proprietary pricing information, internal project information, and even access card

control information.

Also interesting are the classifications of the individuals indicted.

The largest categories were

ex-employees and competitors (and sometimes a combination of the two).

However, company

CLIENT ALERT

March 13, 2006

insiders were also indicted in a number of cases.

Fines and forfeitures range from $10,000 to

nearly $150,000.

Courts handed out jail sentences as long as five years.

Protecting Trade Secrets Through Prosecutions

In seeking protections under the EEA, the most salient factor for companies to understand is that

the EEA is a

criminal

statute.

Every federal court which has considered the issue – all in

unpublished decisions – has held that the statute provides no private right of action.

Most

recently, for example, Senior Judge Haight in the Southern District of New York held that

congressional intent “articulated in the text of the EEA as well as the legislative record,”

“expressly and unambiguously demonstrates that Congress did not establish a private cause of

action in the EEA.”

Cooper Square Realty Inc. v. Jensen

, slip op. (S.D.N.Y. Jan. 10, 2005).

Thus, companies will first have to convince the FBI to investigate a case and then show a federal

prosecutor that their case is worthy of criminal prosecution.

As a general rule, U.S. Attorneys’

offices are not set up to prosecute violations of the EEA in the same manner in which, for

example, they routinely prosecute drug or gun crimes.

Not only that, federal regulations require

that EEA prosecutions be cleared by the Justice Department in Washington.

Specifically,

prosecutions for foreign-related thefts must be approved by Computer Crime and Intellectual

Property Section of the Criminal Division, while domestic-only cases must be approved by the

Internal Security Section before indictments may issue.

Moreover, as even the Justice Department’s Internal Intellectual Property Manual notes,

“[v]ictims of trade secret thefts are often faced with a dilemma when deciding whether to report

the matter to law enforcement authorities.”

While companies don’t want perpetrators to go

unpunished, they are often “concerned that if they report the matter, the trade secret will be

disclosed during discovery or during the criminal trial.”

In order to encourage reporting,

Congress sought to preserve the confidentiality of trade secrets by mandating that courts "shall

enter such orders and take such 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, the Federal Rules of Evidence, and all other applicable laws."

18 U.S.C. §

1835.

Nevertheless, federal authorities cannot guarantee that trade secrets will remain

confidential during prosecutions.

Equally difficult may be convincing prosecutors that they can satisfy that a given company

“secret” – almost always a piece of intangible property – can in fact meet the statutory definition

of a trade secret.

That means showing that it is a secret, subject to reasonable measures to

maintain its secrecy, not readily ascertainable through proper means, and deriving economic

value from its secrecy.

As a practical matter, a U.S. Attorney’s office may take some convincing

before bringing a prosecution.

To summarize, the EEA is a powerful tool for federal prosecutors and potentially a great boon to

companies owning trade secrets.

The objective data, however, indicates that at least in most

judicial districts it may not be used to its greatest extent.

While prosecutions may continue to

CLIENT ALERT

March 13, 2006

increase in coming years, companies will need to work hard to make sure their trade secrets are

protected and to convince prosecutors to go to bat for those trade secrets.

Womble Carlyle client alerts are intended to provide general information about significant

legal developments and should not be construed as legal advice regarding any specific facts

and circumstances, nor should they be construed as advertisements for legal services.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we

inform you that any U.S. tax advice contained in this communication (or in any attachment) is not

intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under

the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any

transaction or matter addressed in this communication (or in any attachment).

Press Millen

is a trial lawyer and

Todd Sullivan

a labor and employment lawyer in the Raleigh

office of Womble Carlyle Sandridge & Rice, PLLC.

They are also the founders of the Womble

Trade Secrets Blog found at

wombletradesecrets.blogspot.com

.