Two recent amendments to the Economic Espionage Act (EEA) signal Congress’ belief that protecting trade secrets should be an important objective of federal law enforcement. Will these legislative changes spur an increase in federal prosecutions for trade secret theft? That is the expectation of some for the Theft of Trade Secrets Clarification Act of 2012 and Foreign and Economic Espionage Penalty Enhancement Act of 2012.1
Recent experience suggests, however, that not much will change. The number of trade secret theft prosecutions has declined over the last several years—a reduction that cannot be attributed to any current limitations of the EEA. The infrequency of trade secret prosecutions is likely attributable to budgetary constraints, a focus on terrorism and financial fraud, and the length and complexity of trade secret investigations. Neither amendment addresses these factors, and recent prosecutions do not suggest a material change in this trend.
The first amendment, the Trade Secrets Clarification Act, specifies that the EEA applies equally to trade secrets related to products a company only uses internally, in addition to products entering the stream of commerce. This amendment responds, in part, to the Second Circuit’s decision last year in United States v. Aleynikov, which reversed the EEA conviction of a Goldman Sachs software programmer, who apparently stole proprietary source code that was used only for Goldman’s internal high-frequency trading platform.2
This amendment also extends the EEA’s reach to include trade secrets related to “services”—a sensible clarification given the ballooning volume of business and consumer services provided online, in an increasingly service-based economy.
The second amendment, the Penalty Enhancement Act, increases the maximum fine for committing trade secret theft on behalf of a foreign government to $5 million for individuals, and $10 million, or three times the trade secret’s value, for corporations. The amendment also directs the U.S. Sentencing Commission to consider enhancing incarceration guidelines applicable to EEA violations.3
Whether federal law enforcement has accomplished the objective of protecting trade secrets is subject to debate. The EEA has been in effect for more than 16 years, but prosecutions have been infrequent and actually declined over the last six years. For the first 11 months of FY 2012, the Justice Department reported 12 new prosecutions with a lead charge of 18 U.S.C. §1832 (Trade Secret Theft)—down from 18 prosecutions in 2006. Similarly, the Justice Department reported seven new convictions under Section 1832 for the same time period, down from 13 convictions in 2006. Also for FY 2012, the Justice Department reported no new prosecutions with a lead charge of 18 U.S.C. §1831 (Economic Espionage), and three new convictions under that provision.4
By comparison, during the first 11 months of FY 2012, the Justice Department instituted 189 new criminal prosecutions for migratory bird law violations; five new prosecutions for stealing or reproducing Postal Service keys; and two new prosecutions for major artwork theft.5 The infrequency of trade secret prosecutions exists despite the Justice Department’s identification of “trade secret theft or economic espionage” as one of four enforcement priorities for intellectual property investigations.6
Guidance for deciding whether to initiate a trade secret prosecution may be found in the United States Attorney’s Manual, which sets forth several factors for consideration: (a) the scope of the criminal activity, including evidence of involvement by a foreign government or agent; (b) the degree of economic injury to the trade secret owner; (c) the type of trade secret misappropriated; (d) the effectiveness of available civil remedies; and (e) the potential deterrent value of prosecution.7 At least two factors appear to be driving recent prosecutions—one policy-oriented, the other pragmatic.
As a matter of national security policy, the Justice Department appears to be giving priority to cases involving Chinese entities. This directive reflects conclusions of the U.S. National Counterintelligence Executive, who characterized “Chinese actors [as] the world’s most active and persistent perpetrators of economic espionage.”8 Recent examples include:
• Two naturalized U.S. citizens and two former DuPont employees charged with conspiring with Chinese state-owned companies to steal trade secrets concerning DuPont’s production technology for commercially-valuable pigment;9
• A researcher for Dow AgroSciences and Cargill, who pleaded guilty to providing stolen trade secrets to others to benefit companies and universities tied to the Chinese government;10
• A software engineer employed by the Chicago Mercantile Exchange, who pleaded guilty to stealing computer code underlying the exchange’s principal trading platform, in order to start a business helping an electronic exchange in China;11
• An electrical engineer employed by GM who, along with her husband, was convicted of transferring secret hybrid technology to a Chinese competitor.12
The Justice Department gives priority to such prosecutions, though it has been reported that approximately 84 percent of its trade secret investigations have no known foreign nexus.13
A second, more practical factor likely influencing prosecutorial discretion is whether the investigation constitutes “low-hanging fruit.” While a common consideration in all criminal cases, this factor is ever more present as the Justice Department confronts constrained budgets. Investigations that require fewer resources to bring to fruition may receive priority.
One example is where the government obtains evidence indicating consciousness of guilt. United States v. Pu may provide a recent instance. There, the government alleges theft of computer code by a former employee of the Citadel hedge fund. When confronted about the unauthorized download of Citadel software, the defendant is alleged to have first attempted unsuccessfully to wipe several hard drives, and then to have enlisted a colleague to dump the hard drives in a nearby canal. Divers subsequently recovered the soggy drives, after which a private forensic analysis located Citadel’s proprietary information on them.14
Trade secret cases also may be selected for prosecution where the victim undertakes aggressive efforts to protect its intellectual property, including cooperation with law enforcement. It has been reported, for example, that DuPont employs former federal agents to police its intellectual property and maintain relationships with criminal authorities. This cooperation is credited for at least four federal prosecutions in recent years.15
Other factors that support a readily prosecutable trade secret case include: (a) whether reliable cooperating witnesses are available; (b) whether undercover operations may be fruitful; (c) the complexity of the technology involved; and (d) a provable motive for the alleged theft.
Related Civil Action
Another consideration that may be playing a larger role in prosecutorial decision-making is the existence of a related civil litigation. While the U.S. Attorney’s Manual notes that the “availability of a civil remedy should not be the only factor considered in evaluating the merits of a referral because the victim of a trade secret theft almost always has recourse to a civil action,”16 existence of a parallel civil suit traditionally has been thought to weigh against prosecution.
However, a recent case, United States v. Kolon Industries, suggests that a related civil litigation had a substantial impact on the decision to prosecute—in part because of investigative work done by the plaintiff. The indictment charges Kolon Industries, a South Korean corporation, and several executives with trade secret theft pertaining to DuPont’s Kevlar fabric, and a similar product manufactured by a Japanese competitor, Teijin Ltd.17
Although prosecutors developed proof in the criminal case through a confidential informant, they also obtained a good deal of evidence from ordinary discovery received by DuPont’s counsel in related civil litigation. The criminal investigation began in 2007, after DuPont learned that a former employee, Mitchell, had contacted current and former DuPont employees seeking technical information on behalf of Kolon. Mitchell became a cooperating witness after FBI agents raided his home; he secretly recorded conversations with Kolon executives and exchanged emails with them under FBI direction.18
By January 2009, however, the Justice Department informed DuPont that the criminal investigation was “dead,” and that it did not oppose DuPont’s filing of a civil action.19
DuPont then filed a civil complaint against Kolon. Cooperation between the Justice Department and DuPont continued and, in late 2009, DuPont produced documents to the Justice Department pursuant to a grand jury subpoena. Included were documents apparently produced by Kolon to DuPont in the civil case. These documents appear to have resurrected the criminal investigation enough to justify a guilty plea by Mitchell in December 2009, along with a second grand jury subpoena to DuPont for additional documents produced by Kolon.20 Meanwhile, the civil case resulted in a DuPont verdict in excess of $900 million in September 2011.21
The indictment followed approximately one year later. The underlying investigation suggests that the policy and pragmatic factors discussed above influenced the Justice Department’s decision to prosecute—but so did the related civil case.
First, the indictment charges corporate espionage allegedly committed by a major competitor based in Asia. Second, one of the alleged victims, DuPont, is known for cooperating with law enforcement.22 Third, the indictment’s allegations suggest indicia of “low-hanging fruit,” including (a) a cooperating witness who pleaded guilty; and (b) a recorded meeting in a Virginia hotel room where a DuPont employee-turned-confidential-informant told Kolon executives he had knowledge of DuPont “trade secrets,” “need[ed] to be compensated for this information,” and then discussed with the executives how his “consultation” could be conducted without creating “evidence.”23
While the above factors no doubt played a critical role in the decision to prosecute, the related civil litigation also was important. The Justice Department apparently obtained certain of Kolon’s internal documents from the grand jury subpoenas issued to DuPont—and not directly from Kolon in South Korea, which might have necessitated working through the time-consuming Mutual Legal Assistance Treaty process between governments.24
The indictment relies on these documents to allege a systematic effort by Kolon to acquire trade secrets of DuPont and Teijin. Kolon allegedly hired former employees of both companies as “consultants” and asked them to divulge the sought-after trade secrets. The indictment excerpts internal Kolon documents, including one discussing “[p]lans for the future use” of a former DuPont employee, including obtaining “[d]etailed understanding of [DuPont]‘s technology and apply to [Kolon].”25 Discovery that DuPont obtained to advance its civil case thus appears to have played a substantial role in the government’s grand jury presentation as well.
The civil litigation ended up contributing to the indictment’s allegations in another way. According to the indictment, Kolon executives engaged in document destruction shortly after learning DuPont had filed the related civil action. A Kolon executive allegedly instructed employees to identify and delete documents related to the DuPont and Teijin “consultants.” Screen shots produced by Kolon to DuPont’s lawyers in the civil case referred to the files selected with the terms “delete” and “get rid of.” The indictment relies upon this evidence to support additional charges of obstruction of justice.26
Considerations for Victims
Whether the existence of a related civil litigation involving victims of trade secret theft will become more significant to future prosecutions is unclear. One constraint: Victims of trade secret theft have legitimate reasons to hesitate before involving law enforcement. First, a victim frequently needs immediate injunctive relief and cannot wait for investigators to decide whether or when to prosecute. Second, the victim potentially loses control over the matter when it hands it over to law enforcement, having to respect those authorities’ decisions about how to proceed. Third, agents or prosecutors are under no obligation to provide specific information to victims during the investigation, and loss of control may extend to the victim’s ability to keep the trade secret confidential. Victims thus may resist making trade secret theft a “federal case.”
The Justice Department has taken a number of recent actions to ramp up enforcement of intellectual property crime.27 Additional steps the Justice Department might consider to enhance trade secret prosecutions are: (1) soliciting more referrals from civil actions, i.e., surveying the intellectual property litigation landscape in the same way the Manhattan U.S. Attorney closely monitors the securities markets; and (2) beefing up investigative assistance by, for example, obtaining technical assistance from U.S. Patent Office examiners to better develop cases.
The greatest impact would be accomplished through a resource shift. But assigning more personnel to prosecute trade secret theft is difficult in the existing environment of fiscal restraint and a continuing focus on terrorism and financial fraud.
The two recent amendments to the EEA may expand the Justice Department’s statutory authority to prosecute and punish trade secret theft. Based on recent experience, however, these changes are unlikely to materially impact the number of trade secret prosecutions—at least in the short term.
Matthew L. Levine is a former federal prosecutor and principal in the Law Offices of Matthew L. Levine, specializing in white-collar defense, intellectual property litigation, and business litigation.
1. See S. 3642, “Theft of Trade Secrets Clarification Act of 2012,” available at http://www.gpo.gov/fdsys/pkg/BILLS-112s3642enr/pdf/BILLS-112s3642enr.pdf; H.R. 6029, “Foreign and Economic Espionage Penalty Enhancement Act of 2012,” available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr6029enr/pdf/BILLS-112hr6029enr.pdf; see also “Trade Secret Cases May Spike After US Strengthens Law,” Law360 (Jan. 2, 2013).
2. United States v. Aleynikov, 676 F.3d 71, 79-82 (2d Cir. 2012). The Second Circuit determined that the conduct proved did not fall within the EEA’s purview, because Goldman’s trading software was only used internally to profit on trades, not out-licensed for use by others in the financial industry. Id.
3. Foreign and Economic Espionage Penalty Enhancement Act of 2012.
4. Transactional Records Access Clearinghouse, TRAC Reports, Prosecutions and Convictions for 2012, Lead Charges of 18 U.S.C. 1831 & 1832 (last visited Dec. 13, 2012). These numbers are an imperfect measure, as some conduct that might constitute trade secret theft also may be prosecuted under other statutes such as mail or wire fraud, theft of government property, or the National Stolen Property Act.
5. TRAC Reports, Lead Charges of 16 U.S.C. 703, 18 U.S.C. 668, 1470 & 1704 (last visited Dec. 13, 2012).
6. U.S. Department of Justice PRO IP Act FY2011 Annual Report to Congress, at 16 (Dec. 2011).
7. U.S. Attorney’s Manual Ch. 9-59.000.
8. Office of the National Counterintelligence Executive, “Foreign Spies Stealing US Economic Secrets in Cyberspace” (Oct. 2011), available at http://www.ncix.gov/publications/reports/fecie_all/Foreign_Economic_Collection_2011.pdf; see also “FBI Traces Trail of Spy Ring to China,” Wall Street Journal, A1 (March 9, 2012) (according to a senior Justice official, “today’s espionage also involves nation states like China focused on stealing research and development, sensitive technology, corporate trade secrets and other materials to advance their economic and military capability”).
9. Superseding Indictment, United States v. Liew, 11-CR-0573 (N.D. Cal. 2011) (Dkt. No. 64).
10. Press Release, U.S. Attorney’s Office, S.D. Ind. (Dec. 21. 2011).
11. Press Release, U.S. Attorney’s Office, N.D. Ill. (Sept. 19, 2012); Plea Agreement, United States v. Yang, 11-CR-458 (N.D. Ill. 2011) (Dkt. No. 78).
12. “Jury Convicts Duo for Stealing GM Hybrid Car Trade Secrets,” Law360 (Nov. 30, 2012).
13. See “Intellectual Property Rights Violations: A Report on Threats to United States Interests Home and Abroad,” National Intellectual Property Rights Coordination Center, at 76 (Nov. 2011), available at http://www.iprcenter.gov/reports/ipr-center-reports.
14. Press Release, U.S. Attorney’s Office, N.D. Ill. (Oct. 13, 2011); Indictment, United States v. Pu, 11-CR-699 (N.D. Ill. 2012) (Dkt. No. 44).
15. “FBI Traces Trail of Spy Ring to China,” Wall Street Journal, A1 (March 9, 2012).
16. U.S. Attorney’s Manual Ch. 9-59.000.
17. Indictment, United States. v. Kolon Indus., 12-CR-137 (E.D. Va. 2012) (Dkt. No. 1).
18. Press Release, U.S. Attorney’s Office, E.D. Va. (March 18, 2010); Kolon Indictment.
19. In re Grand Jury Subpoena, 646 F.3d 159, 161 (4th Cir. 2011).
20. Id. at 162-66; Press Release, U.S. Attorney’s Office, E.D. Va. (March 18, 2010).
21. Id.; see also Complaint, E.I. du Pont de Nemours v. Kolon Indus., 09-CV-58 (REP) (Dkt. No. 1); Press Release, U.S. Attorney’s Office, E.D. Va. (March 18, 2010); “How They Won It: McGuireWoods, Crowell Score for DuPont,” Law360 (Oct. 18, 2011); “Korean Company, Execs Charged in Kevlar Secrets Case,” TimesDispatch.com (Oct. 18, 2012).
22. In re Grand Jury Subpoena, 646 F.3d at 161.
23. Kolon Indictment, at 23. Other allegations include incriminating phone recordings of Kolon executives and payments traceable to former DuPont employees named as unindicted coconspirators.
24. In re Grand Jury Subpoena, 646 F.3d at 162-66.
25. Kolon Indictment, at 8.
26. Id. at 33-34; E.I. du Pont de Nemours v. Kolon Indus., 803 F.Supp.2d 469, 474-95 (E.D. Va. 2011).
27. See, e.g., PRO IP Act Report at 16.