Do-Nothing Congress Manages to Crack Down on Trade Secret Thieves

Joel R. Leeman

By Joel Leeman. A member of our Litigation Practice Group

January 2013 IP Update

A Congress notorious for its polarization and abject futility closed ranks to provide broader protection for trade secrets.  On December 28, President Obama signed the Theft of Trade Secrets Clarification Act, which the Senate had passed unanimously in November and the House—just short of unanimously—in December.

As its name indicates, the law amends the Economic Espionage Act of 1996 (EEA) and expands the jurisdiction of federal courts over cases concerning misappropriation of trade secrets. It was enacted in response to an April 2012 decision of the Second Circuit that exposed an apparent loophole in the EEA.

In 2011, a federal judge in Manhattan sentenced Sergey Aleynikov, a Goldman Sachs computer programmer, to a long prison term for stealing source code used in the firm’s high-frequency trading platform. Aleynikov used the stolen data to develop a similar trading platform at a start-up firm.

The EEA had been intended to enable federal prosecutors to bring criminal charges against individuals like Aleynikov who knowingly misappropriate trade secrets. On appeal, however, the Second Circuit held in 2012 that Aleynikov was wrongly charged with espionage, since Goldman’s high-frequency trading system was not a product designed for interstate or foreign commerce.

The problem for the prosecutors was this: The EEA, as originally passed, calls for imprisonment and fines of whoever intentionally steals a trade secret “that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof.”

The Second Circuit read the bolded language to impose liability where a trade secret relates to products that a company actually sells, not products that a company uses only internally. Indeed, the value to Goldman Sachs of its high-frequency trading system was that no one else had it.  Since the platform was not designed to enter commerce, Aleynikov could not be pinned with a violation of the EEA.

The decision raised bipartisan concern that the EEA was toothless in preventing the misappropriation of certain kinds of trade secret information, such as internal financial instruments.

Congress has now revised the statute by replacing the underlined phrase with “a product or service used in or intended for use in.”  With this swap of clauses, the EEA now applies to trade secrets pertaining to products and services that a company uses internally.  Since “services” are explicitly included, brokerage firms, data analysts and fund managers now have powerful recourse if someone steals trade secrets related to how they do business.

Before the EEA became law in 1996, trade secrets were protected primarily by state law, usually by means of state-adopted versions of the Uniform Trade Secrets Act. Federal courts might obtain jurisdiction over trade secret claims by means of diversity jurisdiction or through criminal charges asserted under federal laws that did not explicitly cover trade secret misappropriation.

The new amendment to Section 1832(a) removes an impediment to comprehensive federal protection of trade secrets.

In a follow-up effort to tighten safeguards for valuable commercial information, Congress passed this month the Foreign and Economic Espionage Penalty Enhancement Act. When the president signs it, the law will amend Section 1831 to increase the maximum fine for stealing trade secrets or possessing them without authorization, with the intent to benefit a foreign government or agent.

The maximum penalty for individual offenses will rise from $500,000 to $5 million, and for corporate offenses from $10 million to the greater of $10 million or three times the value of the stolen trade secret to the organization, including expenses for research and design and other costs that the offending organization has thereby avoided.

This latter penalty begins to recognize the immense ill-gotten savings that a company can enjoy by stealing trade secrets from a competitor rather than spending the time, bearing the uncertainty and incurring the R&D costs of creating its own product or system.

This small flurry of bills is an unusual demonstration of the two political parties joined in a shared commitment– to protect the intellectual property of American businesses and entrepreneurs.