Criminal Consequences of Trade Secret Misappropriation

The enactment of the Economic Espionage Act of 1996 [1] (“EEA”) was greeted with great fanfare as an unprecedented and broad federal attack on foreign and domestic trade secret misappropriation. Negligent, even inadvertent conversions of trade secrets seemed subject to criminal prosecution in the broad wake of the statute. The statute’s draconian criminal penalties for individual and corporate offenders alike, coupled with its license to the Government to seek protective orders, civil injunctive relief, and forfeiture, were viewed as the preferred remedy for the victim of trade secret misappropriation. Yet the plain language of the threshold elements of EEA offenses, and the statute’s restrained interpretation and application by the United States Department of Justice, reveal a statute more limited in prosecutorial scope, with its application bound by significant legal obstacles.

The EEA does not criminalize every theft of trade secrets. Traditional notions of what a protected trade secret is and when a theft is actionable may not apply to an EEA prosecution. Ultimately, the EEA is not a panacea for the victim of a trade secret misappropriation. A civil cause of action that seeks injunctive relief and economic compensation remains the preferred and, perhaps, the most effective method for a victim to achieve an expedited and comprehensive remedy.

Indeed, the single published opinion by a federal appellate court involving an EEA prosecution sends clear warning signals to American private industry of the perils of referring suspected trade secret misappropriation to the Department of Justice for criminal prosecution. [2] The commencement of a federal criminal prosecution under the EEA may compel the disclosure of formerly confidential proprietary information to the defendant and defense counsel as part of discovery in the criminal case; the very same corporate secrets that the victim corporation sought to protect by making its referral to the Government.

United States v. Hsu , which was decided by a panel of the Third Circuit during the summer of 1998, raises troubling issues that corporations and their counsel should carefully consider when weighing the decision of whether to disclose an incident of trade secret theft to the Government or, alternatively, to pursue private remedies under available civil statutes or common law theories. [3] These private remedies, however, may not give comfort to a corporate victim that its proprietary information will be insulated from discovery in civil litigation.
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Yet the EEA is not a sword of Damocles to the unknowing or unwitting corporate beneficiary of a rogue employee’s unlawful conversion of a trade secret. The multiple and substantial intent requirements of the statute would preclude the imposition of corporate vicarious liability for the ultra vires conduct of such an employee. [4] Nevertheless, corporate and other business organizations should take affirmative steps to avoid any exposure under the EEA to the risk of Government investigation through the implementation and enforcement of comprehensive and well-documented trade secret protection programs.

The Government must satisfy high intent and knowledge requirements to prosecute successfully a domestic trade secrets misappropriation violation under the EEA. [5] The prosecutions brought under the statute to date evidence that the effect of these threshold proof requirements has been to limit the exercise of prosecutorial discretion under the EEA to the indictment of conspicuous trade secret theft, which is often motivated by the payment of outright bribes.

Congress imported into the EEA many of the specific intent requirements of the traditional white collar crime statutes -- mail and wire fraud, interstate transportation of stolen property, money laundering -- utilized by the Department of Justice to prosecute the misappropriation of tangible and intangible property crimes. Like the specific intent and knowledge requirements codified in other white collar crime statutes, the EEA mandates that the Government demonstrate to a trier of fact that a defendant acted deliberately and knowingly at the time of the alleged offense. [6] This is a formidable burden for the Government to carry beyond a reasonable doubt at any white collar criminal trial and typically requires the presentation of compelling proof of intent and knowing criminality, which may include the defendant’s own admissions and other direct inculpatory evidence.

Chief amongst the threshold intent requirements of the EEA are three elements that the Government must prove beyond a reasonable doubt at any criminal trial: first, that the defendant acted with specific intent to convert the trade secret with knowledge that the trade secret was proprietary or closely guarded; second, that the defendant attempted to or conspired to convert the trade secret for the economic benefit of anyone other than the rightful owner; and third, that the defendant intended or knew that the conversion offense would injure the lawful owner of the trade secret. [7]

This substantial burden of proof is further heightened by the threshold secrecy requirements of the EEA, which requires that the Government prove beyond a reasonable doubt that the victim-owner of the trade secret had taken reasonable measures to preserve and protect the secrecy of the information at issue, and that the secret information had independent economic value. [8]
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These threshold proof requirements have seemingly narrowed the breadth of EEA prosecutions by the Department of Justice to only clear cases of theft of tangible property where there is physical evidence of the misappropriation. Such evidence is usually obtained from Government-controlled sting operations, in which the defendant’s knowledge and intent are captured in surreptitiously recorded conversations. The indicted and unsealed cases approved by the Department of Justice involving prosecutions of EEA violations reflect that the heartland of EEA criminal conduct excludes historical disputes in which a putative defendant’s intent and knowledge are not easily illuminated by his statements and conduct. [9] In short, defensible claims of trade secret misappropriation are not candidates for prosecution under the EEA.

The formidable statutory barriers to EEA prosecution also may have the effect of spawning parallel civil suits brought by victim corporations to obtain expedited relief including preliminary injunctive relief and compensatory damages. These private civil suits also will impede the successful prosecution of EEA violations by subjecting the Government’s material witnesses in the pending criminal case to searching and protracted depositions and interrogatories even before the Government can present testimony to a jury. Without being able to resort to a private cause of action under the EEA, victim litigants who fear on-going harm and the defendant’s secretion of valuable assets may oppose Government requests for a stay of the parallel civil proceeding. Avery Dennison Corporation and the Government are presently involved in such a dispute. [10]

The backdrop to enactment of the EEA was the perception by Congress that foreign and domestic industrial espionage posed a major threat to American business enterprises. That perception was correct.Corporate spying and theft of proprietary economic information by employees, competitors and foreign governments have cost American businesses billions of dollars. According to a study reported in 1996 by the American Society for Industrial Security, financial losses to American industry resulting from intellectual property theft and misappropriation amount to as much as $63 billion, with losses occurring at an estimated rate of $2 billion a month. The high-tech industry alone suffers an average loss per incident of $19 million. [11]

The biotechnology and pharmaceutical industries are also primary targets for trade secrets theft. The FBI reports more than 800 cases of economic espionage. Most are perpetrated by company insiders who are motivated by both revenge and greed; about 20 percent of economic espionage is committed by agents of foreign governments. [12]

Congress also viewed the prior statutory structure as inadequate in responding to the increased theft of proprietary information. [13] Congress noted that prior to the EEA, federal prosecutors primarily relied on traditional white collar crime statutes, including the Interstate Transportation of Stolen Property Act (“ITSPA”), to prosecute intellectual property-related crimes. [14] ITSPA was enacted in the 1930’s to prevent the movement of stolen property across state lines by individuals attempting to evade the applicability of state and local law. ITSPA, however, relates to “goods, wares, or merchandise.” [15] It was “drafted at a time when computers, biotechnology, and copy machines did not even exist.” [16] Congress recognized, rightfully, that ITSPA was not “particularly well suited to deal with situations involving intellectual property, which by its nature is not physically transported from place to place.” [17]
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Additionally, courts were reluctant to extend ITSPA’s coverage to criminalize intangible property crimes. [18] In United States v. Brown , the defendant worked as a computer software programmer for The Software Link, Inc. (“TSL”), a computer software company located in Georgia. The FBI had conducted a search of Brown’s apartment in connection with a separate investigation and had discovered portions of a source code for TSL’s computer programs. A federal grand jury returned a three-count indictment charging Brown with transporting and receiving stolen property. The United States Court of Appeals for the 10th Circuit affirmed the trial court’s dismissal of the indictment reasoning that the computer program and source code were intangible intellectual property that had not crossed state lines in tangible form, and therefore were not within the statute’s meaning of physical property. [19]

Prior to the enactment of the EEA, prosecutors also relied on the mail and wire fraud statutes to reach crimes involving theft of proprietary information. [20] Courts have held that both of these statutes cover the misappropriation of intellectual property. [21] In United States v. Seidlitz , the Fourth Circuit considered evidence that the owner of a computer software product had invested substantial financial resources in the software and had taken steps to prevent unauthorized persons from using the product. The court held that a software system was “property” within the meaning of the wire fraud statute and that the defendant had violated the statute when he used the telephone to tamper with and manipulate the system. [22]

The application of these traditional white collar crime statutes to trade secret theft is limited. For example, the mail fraud statute is applicable only when the mails are used to commit or facilitate the commission of the offense. [23] Similarly, the wire fraud statute requires proof that wire, radio, or television technology were used to commit or facilitate the commission of the crime. [24]

Congress also recognized that state criminal law was also ineffective in preventing instances of trade secret misappropriation. Although most states have some form of civil remedy for the theft of proprietary economic information (either by recognizing the tort of theft and misappropriation of trade secrets, or through the enforcement of contracts governing the use of such information), only a few states have directly criminalized trade secret thefts. [25] Additionally, many state statutes only apply to the theft of scientific or technical information. The definition of trade secrets under the EEA, on the other hand, addresses the full nuances of protected intangible property. [26]

The EEA has a number of important features that seek to fill the gap in existing federal law and supplement weak state laws. The EEA prescribes stiff penalties including imprisonment, fines and forfeiture of any property or proceeds derived from or facilitating violations. [27] It also authorizes the Government to institute civil enforcement actions and obtain injunctive relief when there is proof of an on-going harm. [28] There is also an extraterritorial jurisdiction provision which applies to conduct occurring outside of the United States if the defendant is either a citizen or permanent resident alien of the United States or a corporation organized in the United States. [29] The Government also can prosecute foreign conduct actionable under the EEA if a significant act in furtherance of the potential offense occurred in the United States. [30]
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Due to the serious penalties involved and the potential to inhibit technological innovation, all prosecutions brought under the EEA for a period of five years from its enactment must first be approved by the Attorney General, the Deputy Attorney General, or the Assistant Attorney General of the Criminal Division. [31] This centralized review and approval process will effectively standardize the Department of Justice’s enforcement of the EEA nationwide.

Furthermore, Congress recognized that corporate victims would be hesitant to report incidents of trade secret misappropriation because of the resulting publicity. The EEA therefore requires that courts enter appropriate protective orders to preserve a trade secret’s confidentiality during the pendency of the EEA criminal proceeding. [32] The scope of this provision of the EEA, as it relates to the conspiracy and attempt provisions of the EEA, has recently been defined by the United States Court of Appeals for the Third Circuit in United States v. Hsu , the first appellate court case to interpret the level of protection a corporate victim has under the EEA. [33] The decision offers corporate victims of trade secret theft little assurance that their proprietary information will be protected from discovery during EEA proceedings.

The EEA was specifically drafted by Congress to minimize the risk that it would be used by the Government to prosecute individuals, including lawful competitors, who use their general business knowledge, skills, and experience to compete with former employers, even as to the “parallel development of a similar product.” [35] Congress did not intend that the EEA “apply to innocent innovators or to individuals who seek to capitalize on the personal knowledge, skill, or abilities they may have developed. The statute is not intended to be used to prosecute employees who change employers to start their own companies from using general knowledge and skills developed while employed.” [36] “[I]t is the intent of Congress . . . to make criminal the act of employees who leave their employment and use their knowledge about specific products or processes in order to duplicate them or develop similar goods for themselves or a new employer in order to compete with their prior employer.” [37] Reverse engineering, however, is “an entirely legitimate practice” which is not prohibited by Congressional mandate. [38] The EEA’s high intent requirement makes it clear, according to Congress, that a prosecutable violation requires “extraordinary theft, not mere competition.” [39]

The EEA has two separate provisions that criminalize the foreign and domestic theft or misappropriation of trade secrets. [40] Both provisions require that the Government prove beyond a reasonable doubt that the defendant obtained, destroyed or conveyed the trade secret information without the authorization of the owner. The requisite mens rea under both provisions is that the defendant “knowingly” misappropriated the trade secret: that is, that the defendant knew that the information was closely-guarded when he converted the secrets to his personal benefit at the expense of the true owner.
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Section 1831(a) specifically addresses foreign economic espionage, punishing the theft, misappropriation, wrongful alteration, and delivery of trade secrets to benefit a foreign government, instrumentality or agency. [41] Here, the prosecution must show beyond a reasonable doubt that the defendant acted with the intent to aid, or had knowledge that his actions would aid, a foreign government, instrumentality or agent. [42]

When there is no such evidence of foreign government involvement, the Government may charge a putative defendant with violations of section 1832(a). This section addresses domestic instances of trade secret theft. Since Congress did not intend for the law to hinder innocent innovators who seek to capitalize on their lawfully developed knowledge or skills, §1832(a) incorporates a high threshold of specific intent and knowledge. Here, the Government must show beyond a reasonable doubt that: (i) the defendant actually attempted or conspired to steal trade secrets with the specific intent of converting the trade secret to the economic benefit of someone other than the owner; (ii) the defendant intended to or knew that the offense would harm or injure the owner; and (iii) the trade secret was related to, or included in a product that was produced for or placed in, interstate or foreign commerce. [43]

The substantial intent and knowledge requirements of the EEA were designed by Congress to prevent Government prosecutions of mistaken or accidental conversions of trade secrets, or instances of misappropriation where the purported trade secrets may be publicly known or without potential economic value.

The EEA’s broad definition of a trade secret includes a wide array of technological and intangible information that is “no longer restricted to formulas, patterns, and compilations, but now includes programs and codes, ‘whether tangible or intangible, and whether or how stored.’” [45] Section 1839 defines “trade secrets” as “all forms and types of financial, business, scientific, technical, economic, or engineering information.” [46]
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Information such as a customer list may easily qualify as a trade secret if it has been developed at significant expense over time and is kept a secret by the owner. Similarly, market analysis procedures, service manuals, and technical data can be defined as trade secrets under the EEA.

The information is deemed a trade secret if: (1) the owner took reasonable measures to keep the information secret commensurate with the value of the trade secret; and (2) the information derives actual or potential independent economic value from not being made known to the public. [47]

The Government must demonstrate that the information was not known to, or readily ascertainable by the victim’s competitors in the industry and the general public. [48] Prosecutors must determine the extent of security measures used to protect the trade secret, including physical security, computer security, as well as the company’s policies on sharing information with employees, sub-contractors and licensed vendors. If low-level employees in a large company could have gained access to the information then the information is not considered a protected trade secret under the EEA. [49]

Further, the trade secret must derive “independent economic value . . . from not being generally known to . . . the public.” [50] The Act does not require that the Government provide a specific value for the information. In some circumstances, the value of the information can be established by showing what the trade secret was worth on the open market. Case law in a civil trade secret context might be instructive in determining what constitutes a relevant market value.

This economic value element may pose a substantial evidentiary obstacle to the Government if the trade secret was stolen at the developmental stage or if the victim-company chose not to sell or license the technology. Proof of the potential economic value of the technology at any jury trial would require expert testimony that would likely be subject to extensive cross-examination and impeachment by rebuttal testimony.
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According to the indictment, returned by a federal grand jury more than a year before the Third Circuit’s opinion on the Government’s interlocutory appeal, the defendants were ensnared in an FBI-orchestrated “sting” operation in which they were negotiating to purchase the Taxol technology from an FBI undercover agent posing as a technological information broker. The operation culminated in the defendants meeting with a purportedly corrupt Bristol-Myers scientist who was cooperating with the FBI. [54]

Over a fourteen-month period, the defendants allegedly offered to pay $400,000 in cash, stock, and royalties to obtain the Taxol technology. At the pre-arranged meeting, the scientist provided detailed information about Taxol production and displayed sensitive corporate documents that were clearly marked “confidential.” The defendants reviewed the documents and asked the Bristol-Myers scientist numerous questions about the Taxol technology. The defendants were arrested by the FBI before the sale of the documents could be consummated. The indictment charged the defendants, in part, with attempt and conspiracy to steal trade secrets in violation of 18 U.S.C. §§1832(a)(4) and (a)(5). [55]

In pre-trial motions, the defendants had sought discovery of the confidential documents used in the FBI sting operation. The Government had produced to the defense a sanitized version of the documents after they had been redacted by Bristol-Myers Squibb. The defendants argued that they needed the entirety of the very documents they were accused of conspiring and attempting to steal in order to establish that the Government had failed to prove an essential element of its case: the existence of a trade secret. [56] The defendants asserted a legal impossibility defense: they contended that, as a matter of law, they could not be convicted of attempting and conspiring to steal a trade secret if the documents they were shown by the Government during the sting operation did not contain trade secrets. [57]
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The defendants proposed a protective order that would have required the Government to disclose the proprietary information about Taxol to defense attorneys, experts, and witnesses. The Government opposed the defendants’ discovery motion and sought a protective order under §1835 of the EEA to protect the Bristol-Myers’ trade secrets from disclosure. [58] Section 1835 provides that a district court “shall enter such orders and take such 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, the Federal Rules of Evidence, and all other applicable laws.” [59]

The Government argued that the defense did not need access to the confidential information because the indictment only charged the defendants with attempt and conspiracy, and not an actual theft of trade secrets. The Government also proposed that the district court review the documents in camera to determine the discoverability of the proprietary information prior to any court-ordered disclosure to the defense.

The trial court balanced the competing interests of trade secret confidentiality and the defendant’s constitutionally-mandated right to full discovery of material evidence, and ruled in favor of the defendants’ access to the claimed proprietary information. [60] U.S. District Judge Stewart Dalzell of the Eastern District of Pennsylvania held that the defendants’ constitutional right to use the alleged stolen material to prove at trial that it was not a trade secret exceeded the victim’s right to absolute trade secret confidentiality, and ordered Bristol-Myers to hand over the information to the defendants in unredacted form. [61] The trial court reasoned that “. . . the defendants must be given the ‘correlative right’ to compare the information relating to Taxol production that is publicly available, e.g. in the form of patents and scientific literature, with whatever details of the Taxol technology that the Government will claim at trial is a confidential ‘trade secret’.” [62]

The trial court reduced the scope of the protective order sought by the Government under §1835 to a signed non-disclosure agreement binding the defendants’ attorneys, outside defense experts, and certain prospective defense witnesses who would need access to the proprietary information to assist in the preparation of a defense. [63]

The defense camp was precluded by the terms of the protective order from utilizing the proprietary information for purposes collateral to the defense of the EEA prosecution. They also were prohibited from disclosing the information to unrelated third parties. The district court’s protective order was, at best, a Pyrrhic victory for the Government and Bristol-Myers Squibb.
¶45
The Government immediately took an interlocutory appeal of this decision to the Third Circuit pursuant to 18 U.S.C. §1835, which provides that “[a]n interlocutory appeal by the United States shall lie from a decision or order of a district court authorizing or directing the disclosure of any trade secret.”

The Third Circuit, in an opinion by Judge Marjorie O. Rendell, reversed the district court’s mandated disclosure of the unredacted Bristol-Myers Squibb documents. [64] The Court’s rationale was two-fold: first, it ruled that legal impossibility is not a viable defense to charges of attempt and conspiracy to steal trade secrets in violation of the EEA. Second, the Court noted that the district court had mistakenly believed that the defendants were charged with the completed offense of trade secret theft. [65]

The Court held that the Government can satisfy its burden in a conspiracy and attempt prosecution under the EEA by proving beyond a reasonable doubt that the defendants had sought to acquire information that they believed to be a trade secret, regardless of whether the information actually qualifies as trade secret information under the EEA. Since the Government does not have to prove that actual trade secrets were used in a sting operation that did not result in the actual sale of proprietary information, the Court concluded that the defendants had not established a legal basis for discovery of the Taxol information. [66]

In reaching its holding that the defense of legal impossibility is not available in an EEA attempt and conspiracy prosecution, the Court relied on the legislative history of the EEA. The Court opined that Congress intended to provide a comprehensive solution to corporate economic espionage, and had not intended to recognize the common law defense of legal impossibility as a complete defense to a charged violation of the EEA. The Court indicated that such a defense would severely undercut the enforcement of the EEA because the Government would be forced to disclose actual trade secrets during undercover or “sting” operations. [67] Similarly, the Court reasoned that legal impossibility is not a defense to a charge of conspiracy because it is the conspiratorial agreement, and not the underlying substantive acts, that forms the basis of a conspiracy charge. [68]

The Hsu defendants had raised for the first time on appeal the contention that the unredacted documents were also material to their presentation of potential defenses of entrapment, outrageous government misconduct, and lack of jurisdiction. Noting its skepticism of the relevance and materiality of the Bristol-Myers Squibb trade secret information to those defenses, the Third Circuit refused to address the claims because the defendants had not raised these issues in the district court as a basis for discovery. [69]
¶50
The Third Circuit remanded the case to the district court to (i) conduct an in camera review to determine whether Bristol-Myers Squibb had in the first instance, at the Government’s behest, properly redacted the documents to exclude only confidential information; and (ii) to determine whether the redacted information is material to the other defenses raised for the first time on appeal. [70]

The Third Circuit did not decide whether a defendant may obtain production of a corporate victim’s trade secret information when a completed trade secret theft has been charged by the Government. Although Hsu left unresolved this tension between the EEA confidentiality provision and a criminal defendant’s constitutional right to discover documents that will assist in his or her defense, the Court did frame the inquiry: is the actual content of a victim’s confidential information relevant to the determination of whether the information is a “trade secret” as defined under the EEA? [71]

The legislative history of the EEA suggests that proof of the existence of a trade secret may be essential to the prosecution of an EEA violation. Under §1839(3) of the EEA, information is deemed to be a trade secret if: (1) the owner took reasonable steps commensurate with the value of the trade secret to keep the information secret; and (2) the information derives actual or potential independent economic value from not being made known to the public. [72]

The Third Circuit also suggested that proprietary information may be discoverable if it is material to a recognized defense. The Court indicated that “[e]ven if proof of an actual trade secret is not an element of §§1832(a)(4) and (a)(5), an independent assessment of whether materials are nonetheless discoverable is anticipated in the language of §1835 . . . .” [73] The Court was guided by the language of Rule 16(a)(1)(C) of the Federal Rules of Criminal Procedure which provides that “defendants can obtain documents in the government’s possession that are material to the preparation of their defense, or which are intended for use by the government as evidence in chief at trial.” [74]

Since a court’s determination of materiality is influenced by the Government’s charging decisions and the defenses raised by the indicted defendants, the corporate victim may have little control over the discoverability of its proprietary information in an EEA prosecution. In Hsu, Bristol-Myers Squibb had sought to protect its Taxol process from disclosure by itself redacting the documents, without oversight by either the district court, or the Government, let alone the defendants. The Third Circuit, however, refused to grant such absolute discretion to the owner of a trade secret, noting that the unredacted documents could reveal information material to theories of defense. It ruled that the district court could not make a judgment about the materiality of the unredacted materials without first reviewing the materials in camera. [75]
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After Hsu, prosecutors may opt to protect a victim’s trade secrets from disclosure during an EEA prosecution by structuring the indictment to foreclose discovery of trade secret information. To gain a victim’s cooperation in an EEA prosecution, the Government may be forced to charge only attempt and conspiracy violations and use documentary evidence at trial that does not contain the victim’s valuable trade secret information. For example, in Hsu, the Government assured the Court that it did not intend to use or refer to the alleged trade secret documents at trial. Instead, the Government indicated that it intended to prove the attempt and conspiracy violations with other evidence, including an e-mail list that defendant Chou had allegedly sent to the cooperating Bristol-Myers Squibb scientist outlining the “core technology” that the defendants would need to complete a deal. [76] The Government intends to use this evidence to prove that the defendants attempted to steal what they believed were trade secrets, although the Government will present to the jury the actual content of the redacted proprietary information.

The Hsu trial court rightly warns American private industry that the EEA was not designed by Congress to offer “perfect” protection in a highly competitive global market. [77] This warning was echoed by the Third Circuit’s refusal to offer Bristol-Myers Squibb absolute protection from the potential discovery of its confidential information. Hsu does not allay the concerns of victim corporations who fear that reporting trade secret misappropriation schemes to the Government will inevitably result in the judicially-compelled disclosure of their proprietary information to the defense.

The principal lesson of Hsu for the corporate victim may be that, ultimately, the best remedy is the implementation of a well-documented trade secret protection program that minimizes the risk of future incidents and, if necessary, assists in demonstrating the confidentiality of a trade secret in any legal proceeding. Owners of trade secrets should: (i) clearly mark information which they consider to be proprietary; (ii) protect the physical property in which trade secrets are stored; (iii) limit employees’ access to trade secrets to only those who need access in the performance of their duties; and (iv) train all employees on the nature and value of the company’s trade secrets.

An EEA prosecution scheduled for trial in mid-March in an Ohio federal district court evidences the continuing tension between the Government’s interest in successfully enforcing the EEA and that of a corporate victim, the Avery Dennison Corporation, in protecting its proprietary information from public disclosure. Rather than wait for the Government to vindicate the confidentiality of its proprietary information in the EEA case, Avery Dennison chose to seek civil remedy. United States v. Pin Yen Yang , involves the alleged theft and attempted theft of Avery Dennison proprietary manufacturing information and research data over an eight year period. [78] A parallel civil RICO suit brought by Avery Dennison against the criminal defendants, seeks preliminary injunctive relief and compensatory damages. A Government motion, opposed by Avery Dennison and the defendants, to stay the discovery in the civil RICO action pending the trial of the EEA criminal case was granted in part. The Government’s principal witness in the criminal case, cooperating defendant Lee, cannot be deposed prior to the commencement of the criminal trial, unless the civil trial proceeds first and Avery Dennison calls Lee as a witness. The Government’s other material witnesses are subject to deposition.

The Avery Dennison case may help to resolve the unanswered question in Hsu: whether proof of the existence of a trade secret is required when a defendant is charged with the substantive offense of trade secret theft.
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Civil statutes impose similar burdens of proof in establishing the existence of a trade secret which may compel a victim corporation to disclose confidential information during the course of discovery. For example, when a departing employee misappropriates corporate trade secrets, the former corporate employer will inevitably seek, through the commencement of litigation, to enjoin the former employee from using the misappropriated information during the course of his or her new employment. If there is a valid non-competition or confidentiality agreement, an employer will seek to enforce it to prevent disclosure of the confidential information. Here too, however, the employer must initially establish that the proprietary information is a trade secret. Much like the inquiry under the EEA, courts that have decided civil claims have looked to such factors as (1) the extent to which the information is known outside of the business; (2) the degree of measures taken by the employer to guard the secrecy of the information; and (3) the ease or difficulty with which the information could be properly acquired by others. [79]

In Hsu, the Third Circuit noted that the definition of a trade secret under the EEA is similar to that required by many state civil statutes and the Uniform Trade Secrets Act (UTSA). The only apparent distinction is that under the EEA, information is a trade secret if it is not generally known to, or readily ascertainable by, the victim’s competitors and the general public. Under the UTSA, however, information is a trade secret if it is not known by competitors. [80]

Regardless of the legal remedy that a corporate victim may pursue to prevent the unauthorized use of proprietary information, the corporation must confront the very real possibility that it may be forced to disclose sensitive information during the discovery and trial phases of legal proceedings. Civil remedies may provide the corporate victim a greater degree of control over the direction of trade secret litigation, and afford the victim the opportunity to obtain monetary relief. The EEA’s stiff criminal penalties, on the other hand, are a strong deterrent against the misappropriation of trade secrets.

United States v. Worthing , Crim. No. 97-9 (W.D. Pa, Crim. Complaint filed Dec. 9, 1996). On December 7, 1996, the first arrest under the EEA was made in Pittsburgh, Pennsylvania. Patrick Worthing and his brother, Daniel, were arrested by FBI agents after agreeing to sell Pittsburgh Plate Glass (“PPG”) proprietary information for $1,000 to a FBI undercover agent posing as a representative of Owens-Corning. The Government alleged that Worthing solicited Owens-Corning’s CEO under an assumed name in a letter that stated: “Would it be of any profit to Owens-Corning to have the inside track on PPG?” The Owens-Corning executive, in turn, provided the letter to PPG executives who then contacted the FBI. Both defendants were charged under 18 U.S.C. § 1832. Patrick Worthing admitted to stealing documents, blueprints, photographs, and product samples from PPG. He pled guilty to the theft of trade secrets, and was sentenced to 15 months in jail and three years of probation. His brother also pled guilty to conspiracy to violate the EEA for which he received five years of probation.

United States v. Davis , Crim. No. 97-CR-124 (M.D. Tenn. 1997). On January 26, 1998, Steven Louis Davis, a contractor who was employed by Massachusetts-based Gillette, pled guilty to five counts of theft of trade secrets in violation of the EEA. Davis was an engineer with Wright Industries, a contractor engaged by Gillette to develop production equipment for a new shaving system design. Davis downloaded 600 megabytes of secret data and drawings from the confidential Gillette project onto his laptop computer. In anger at his supervisor and fearing that his job was in jeopardy, Davis disclosed the proprietary information to Gillette competitors by fax and e-mail, including Schick, Wilkinson, and Bic. Davis was sentenced to 27 months of imprisonment and ordered to pay $1.2 million in restitution to Gillette.

United States v. Yang , Crim. No. 97-CR-288 (N.D. Ohio 1997). On September 5, 1997, Dr. Ten Hong Lee, an employee of the Avery Dennison Corporation in Concord, Ohio was arrested when an FBI surveillance team captured him rummaging through a colleague’s files which contained confidential documents. After his arrest, Lee cooperated with officials to obtain the indictment of the chairman of Four Pillars, Pin Yen Yang, and his daughter Hwei Chen Yang, an employee of Four Pillars. Lee had reportedly received between $150,000 and $160,000 from Four Pillars/Pin Yen Yang for his involvement in causing the transfer of Avery Dennison’s proprietary manufacturing information and research data over an eight year period. On October 1, 1997, a federal grand jury returned a 21 count indictment charging Four Pillars, Pin Yen Yang and Hwei Chen Yang with theft and attempted theft of trade secrets, mail fraud, wire fraud, money laundering, and receipt of stolen property. Lee pled guilty to one count of wire fraud. A parallel civil RICO suit brought by Avery Dennison against Four Pillars, both of the Yangs, and Lee, seeks preliminary injunctive relief and compensatory damages. The case is scheduled for trial in mid-March of this year.
¶70
On January 5, 1999, it was reported that Four Pillars, the Taiwanese adhesive company that employed the defendants, filed a civil complaint in Taiwan against Avery Dennison alleging fraud and theft, and seeking $262 million in damages. Four Pillars alleges that Avery Dennison initiated talks with it about a joint venture agreement with the intent to gain trade secrets from Four Pillars during the course of negotiations. Avery Dennison has denied the claims and asserts that the complaint is an attempt by Four Pillars to distract attention from its own legal problems spawned by the Yang prosecution. [83]

United States v. Trujillo-Cohen, Crim. No. 97-CR-251 (S.E. Tex. Indictment filed Nov. 14, 1997). In November, 1997, federal prosecutors in Houston charged a former employee of Deloitte and Touche with attempting to sell confidential software programs. The employee allegedly downloaded the programs onto her personal laptop computer and then engaged in negotiations to sell the software to a company in New York for $7 million. The indictment charged her with two counts of EEA violations. The defendant pled guilty to one EEA violation and a wire fraud count, and was sentenced to 48 months of imprisonment and ordered to pay $337,000 in restitution.

United States v. Pei , Crim. No. 98-M-4090 (D.N.J. 1998). In July 1998, Huang Dao Pei, a former research scientist for Roche Diagnostics, a division of health care giant Hoffman La Roche, was arrested and charged with attempting to steal Roche’s trade secret for a Hepatitis C monitoring kit Pei hoped to sell in China. Pei allegedly attempted to buy the information from a Roche employee who was cooperating with FBI agents. Pei requested specific documents that would show him how to duplicate parts of the kit. It is reported that the diagnostic kit took millions of dollars to develop and is the market leader.

United States v. Camp , Crim. No. 98-CR-48-P-H (D. Maine 1998). In late July 1998, Caryn L. Camp, a chemist at Idexx Labs, a Maine-based manufacturer of veterinary products, accidentally sent an e-mail that contained allegedly incriminating evidence about Camp’s theft of confidential Idexx information to an Idexx manager. The e-mail allegedly revealed Camp’s plan to resign and deliver Idexx trade secrets to her new employer, Stephen R. Martin, a Sonoma county veterinarian. Both Camp and Martin were indicted on multiple counts of conspiracy to steal trade secrets, mail and wire fraud, interstate transportation of stolen property, and conspiracy to transport stolen property. Trial is tentatively scheduled for June 7, 1999.

United States v. Hallstead , Crim. No. 98-CR-00041 (E.D. Texas 1998); United States v. Pringle , Crim. No 4:98-M00037 (E.D. Texas 1998). In July, 1998, Steven Craig Hallstead pled guilty to a conspiracy to steal trade secrets. Hallstead and an accomplice, Brian Russell Pringle, who also pled guilty, contacted Cynix Corp., a division of National Semiconductor Corp., offering to sell stolen prototype Intel Corp. “Slot II” computers for $75,000. An FBI sting operation exposed Hallstead and Pringle.Hallstead was sentenced to a term of imprisonment of 77 months, three years of supervised release, and was ordered to pay a criminal fine of $10,000. Pringle was sentenced to a 60-month term of imprisonment, three years of supervised release, and a $50,000 fine.
¶75
United States v. Fulton , Crim. No. 98-CR-0059 (W.D. Pa 1998). John Fulton, a former employee of Joy Mining Machinery, Inc., pled guilty on April 17, 1998 to stealing Joy trade secrets. Fulton stole schematic designs for an electronic switch box that operates components of a coal-mining machine that Joy manufactures. Fulton reportedly intended to use the diagrams to start his own competing business. He admitted offering another Joy employee $1,500 for confidential information. He was sentenced on November 13, 1998 to five years of probation, including 12 months of home detention.

United States v. Campbell , Crim. No. 98-CR-64 (N.D. Georgia 1998); United States v. Soucy , Crim. No. 98-CR-59 (N.D. Georgia 1998). Carroll Lee Campbell, a former circulation manager for the Gwinnett Daily Post, was sentenced to three months in prison, four months of home probation, and a fine of $2,800 for offering to sell confidential business information. Campbell offered to sell Gwinnet’s marketing plans and subscription lists to Gwinett rival, the Atlanta Journal-Constitution, for $150,000 while the two papers were engaged in a lawsuit over which had the right to publish Gwinett County legal notices. Campbell sent letters and used an alias to communicate with representatives of the Journal by phone and through personal ads in the paper. The Journal notified authorities. Campbell and a co-worker, Paul Soucy, both pled guilty to conspiracy to steal trade secrets. Soucy was sentenced to three years probation, and was ordered to pay a $1,000 criminal fine and $500 in restitution. Campbell was sentenced to three months of imprisonment, four months of home confinement, and ordered to pay $2,800.

United States v. Krumrei , Crim. No. 98-CR-80943 (E.D. Michigan 1998). While employed with Vactec Coatings, defendant David T. Krumrei allegedly attempted to sell the process plan for Formica, information which Vactec was developing for Wilsonart. The information is said to have been worth millions of dollars to a Wilsonart competitor. Trial is scheduled for June 7, 1999.

There also are alleged reports of an ongoing criminal investigation as to whether Reuters Analytics, Inc., a Stamford, Connecticut subsidiary of Reuters Holding P.L.C. of London, stole proprietary data from a rival news service, Bloomberg, L.P. According to a published report, the Reuters subsidiary allegedly induced a consultant to conduct electronic break-ins of Bloomberg computers to obtain confidential data. The parent company claims that it had no knowledge of any wrongdoing by the subsidiary. [84]

These Government prosecutions under the EEA should not mislead corporate victims that the perils of compelled disclosure are unique to the Hsu decision. Hsu remains a significant deterrent to bringing the Government into internal investigations of trade secret theft. Because the Government is not involved in a civil suit, the decision to pursue civil remedy may invest a business with greater control over litigation tactics. However, given that a civil suit may still require that the victim prove the existence of a trade secret, a civil forum may not provide any greater comfort for a corporate victim that its proprietary information will be absolutely insulated from discovery.
¶80

To ensure further compliance with the EEA and to avoid potential Government enforcement investigations, companies may wish to take the following steps:

Thus, while the EEA does address the nuances of trade secrets, unlike the traditional federal white collar crime offenses of mail or wire fraud, for a victim corporation it may not be a preferred remedy to a civil cause of action for injunctive relief and compensatory damages.

[fnA]Mark D. Seltzer is Of Counsel at the Boston law firm Goulston & Storrs, where he concentrates his practice in the representation of corporations and individuals in white collar criminal investigations and trials, and related civil, administrative, and regulatory enforcement proceedings, compliance matters, and internal investigations. He is a member of the firm’s Regulatory Compliance and White Collar Criminal Defense Practice Group. Prior to joining Goulston & Storrs, Mr. Seltzer was a federal prosecutor for thirteen years both in Boston, as Director of the New England Bank Fraud Task Force of the United States Department of Justice, and in Miami, as an Assistant United States Attorney for the Southern District of Florida. He has spoken and written extensively on issues involving trade secret theft, and has authored three articles on the Economic Espionage Act of 1996 for White-Collar Crime Reporter : the first, for the September 1998 issue, entitled “The Criminal Consequences of Trade Secret Misappropriation;” the second, for the January 1999 issue, entitled “Trade Secret Information May Still Be Discoverable To Defend Completed EEA Violations Under Recent Third Circuit Case;” and the third, for the February 1999 issue, entitled “Victim Corporations May Be Forced To Disclose Valuable Trade Secret Information In Economic Espionage Act Prosecutions.”

Angela A. Burns, J.D. 1999 Northeastern University Law School is a law clerk at Goulston & Storrs.
[1] See 18 U.S.C. §§ 1831-1839.
[2] See United States v. Hsu, 155 F. 3d 189 (3d Cir. 1998).
[3] See 155 F. 3d 189.
[4] See 18 U.S.C. § 1832.
[5] See H.R. Rep. No. 104-788 (1996).
[6] See 18 U.S.C. §§ 1831(a)-1832(a).
[7] See Hsu, 155 F.3d at 195 (citing 18 U.S.C. § 1832).
[8] See 18 U.S.C. § 1839(3).
[9] See discussion infra, Part XII.
[10] See United States v. Pin Yen Yang , Crim. No. 97-CR-288 (N.D. Ohio 1997).
[11] See Neil J. Gallagher, Statement for the Record Before the Congressional Joint Economic Committee , March 24, 1998, <http://www.fbi.gov/congress/gallaher.htm>, (visited April 12, 1998); See also H.R. Rep. No. 104-788 (1996).
[12] See Robert Matthews, Post Cold War Spies Will Stop at Nothing to Trade in Secrets , SUNDAYTELEGRAPH, Dec. 14, 1997, at 4.
[13] See H.R. Rep. No. 104-788 (1996).
[14] See id. (citing 18 U.S.C. § 2314).
[15] See id.
[16] See S. Rep. No. 104-359 at 10 (1996).
[17] See H.R. Rep. No. 104-788 (1996).
[18] See e.g. United States v. Brown, 925 F.2d 1301, 1308 (10th Cir. 1991).
[19] See id ; see also Dowling v. United State s, 473 U.S. 214, 216 (1985) (holding that ITSPA “seems clearly to contemplate a physical identity between the items unlawfully obtained and those eventually transported, and hence some physical taking of the subject goods.”).
[20] See 18 U.S.C. §§ 1341 and 1343.
[21] See e.g., United States v. Seidlitz, 589 F.2d 152, 160 (4th Cir. 1978).
[22] See id.
[23] See 18 U.S.C. § 1341.
[24] See 18 U.S.C. § 1343.
[25] See H.R. Rep. No. 104-788 (1996). Massachusetts has two provisions under General Laws Chapter 266 that criminalize the theft of trade secrets. Section 30(4) addresses the theft of trade secrets and section 60A criminalizes the sale or purchase of trade secrets. Like the EEA, the Commonwealth must prove that the owner took precautionary measures to secure and protect the confidentiality of the trade secret. See Commonwealth v. Robinson, 7 Mass. App. Ct. 470, 473 (1979) ( quoting Jet Spray Cooler v. Crampton, 361 Mass. 835, 840 (1972) (though defendant fraudulently obtained the victim’s process and used the information to manufacture and sell a similar device, section 30(4) did not apply because there was no indication that the victim took any precaution to secure the secrecy of the information.). This high burden of proof may explain the lack of published cases under 30(4) and 60A.
[26] See 18 U.S.C. § 1839(3).
[27] See 18. U.S.C. §§ 1831(a), 1832(a) and 1834.
[28] See 18 U.S.C. § 1836.
[29] See 18 U.S.C. § 1837.
[30] See id.
[31] See U.S. Dep't of Justice, Federal Prosecution of Violations of Intellectual Property Right s 85 & n. 109 (May, 1997) [hereinafter DOJ Manual].
[32] See 18 U.S.C. § 1835
[33] See 155 F. 3d 189 (3d Cir. 1998).
[34] See 18 U.S.C. §§ 1831(a) and 1832(a).
[35] See 142 Cong. Rec. S12,213 (1996); see also Hsu, 155 F.3d at 197.
[36] H.R. Rep. No. 104-788 (1996).
[37] Id.
[38] 142 Cong. Rec. H10,462 (1996).
[39] Id.
[40] See 18 U.S.C. §§ 1831(a) and 1832(a).
[41] See 18 U.S.C. § 1831(a).
[42] See id.
[43] See Hsu, 155 F.3d at 195-96 (citing 18 U.S.C. § 1832(a)).
[44] See H.R. Rep. No. 104-788 (1996).
[45] 18 U.S.C. § 1839(3).
[46] Id.
[47] See 18 U.S.C. § 1839(3).
[48] See Hsu, 155 F.3d at 196.
[49] See DOJ Manual, supra note 32, at 76.
[50] See 18 U.S.C. § 1839(3)(B).
[51] 18 U.S.C. § 1832(a).
[52] 18 U.S.C. § 1835.
[53] See United States v. Hsu, 155 F.3d 189.
[54] See id. at 192.
[55] See id. at 193.
[56] See United States v. Hsu, 982 F. Supp. 1022, 1026 (E.D. Pa. 1997).
[57] See id. at 1027.
[58] See id. at 1026 & n.5.
[59] 18 U.S.C. § 1835.
[60] See Hsu, 982 F. Supp. at 1027.
[61] See id. at 1025.
[62] See id.
[63] See id. at 1023, 1025.
[64] See Hsu, 155 F.3d at 203.
[65] See id.
[66] See id.
[67] See id. at 202.
[68] See id. at 203.
[69] See id. at 205.
[70] See id.
[71] See id. at 198, n. 15.
[72] 18 U.S.C. § 1839(3).
[73] Id. at 205.
[74] See id.; see also F.R.C.P. Rule 16(a)(1)(C).
[75] See Hsu, 155 F.3d at 205.
[76] See id. at 204-05, n. 22.
[77] See Hsu, 982 F.Supp. at 1027.
[78] United States v. Pin Yen Yang , Crim. No. 97-CR-288 (N.D. Ohio 1997).
[79] See e.g. Danieli v. Braverman, Civ. No. 9306532, 1994 WL 879855, *4 (Mass. Super. Jan. 20, 1994) (citing Augat, Inc. v Aegis, Inc., 565 N.E.2d 415 (1991)); Pepsico, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995) (citing Illinois Trade Secret Act, which supplants common law remedies but does not dispense with the requirement that the plaintiff must show either the existence of a trade secret or the likelihood that a former employee will compromise those secrets or other confidential business information); see also Jet Spray Cooler, Inc. v. Crampton, 282 N.E.2d 921, 925 (1972) (citations omitted).
[80] See Hsu, 155 F.3d at 196-97 (citing UTSA §1(4)).
[81] See 18 U.S.C. §§ 1831(a), 1832(a), and 1834.
[82] See Hsu,155 F.3d 189; see also United States v. Yang, supra.
[83] See Patricia M. Smith, Avery Dennison Charged with Fraud and Theft of Trade Secrets , Business Wire, Jan. 5, 1999.
[84] See Kurt Eichenwald, Reuters Unit is Investigated Over Theft of Rival’s Data , N.Y. Times, Jan. 30, 1998, at A1.

� 1999 Mark D. Seltzer and Angela A. Burns. Published with permission of the copyright holder.