n July 1999, then-Deputy Attorney General Eric Holder Jr. was in San Jose to tell a new breed of crooks that the jig was up.
From here on out, Holder said, the Justice Department would focus on intellectual property crimes. What was once prosecuted only selectively was now an official "priority" in Washington.
"This is theft. Pure and simple," Holder said.
At the press conference, Holder was joined by several high-ranking representatives of the business community, including Charles Geschke, chairman of Adobe Systems Inc., who would later prove that prosecuting IP crimes is not always as easy as the government would like.
Earlier this year Adobe referred the first prosecution under the Digital Millenium Copyright Act to the U.S. attorney in San Francisco. Russian computer programmer Dmitry Sklyarov was arrested after an Internet security convention in Las Vegas and charged with writing code that could crack the encryption on Adobe products.
Almost immediately, the case became a bona fide public relations disaster for Adobe.
International media took notice as Web sites sprung up to defend him. The Electronic Frontier Foundation, a San Francisco-based electronic rights group, took its ire straight to the company. And John Keker, acknowledged as one of the best defense attorneys in the country, took Sklyarov's case for free.
Overwhelmed by the hue and cry, Adobe officials, who no longer talk about the company's role in the case, backpedaled. On July 23 -- two years to the day after Geschke had stood by Holder's side -- Adobe announced it was withdrawing support for Sklyarov's prosecution.
Since authorities have increased their focus on IP, not much has been pure and simple. As white knights delving into IP crimes to preserve the vitality of the American economy, government prosecutors often find themselves negotiating uncooperative victims, angry activists and a world where right and wrong are murky enough to make Sam Spade crack a smile.
Government prosecutors have tended to tread carefully when pursuing trade secret cases, but emerging technologies and new laws have even cast shadows across the once clear-cut area of copyright law. As the government proceeds to chase IP crooks through the back alleys of the information economy, civil lawyers who call this their territory have a word of advice: caution.
Little To Be Gained?
DEFINING THE PROBLEM: Defense lawyer Thomas Nolan says one problem with trade secret prosecutions is that it's "only intellectual property if the owner says it is. They get to define it."
Photo: Shelley Eades
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Six months after Holder's visit, then-U.S. Attorney Robert Mueller III established the Justice Department's first CHIP (Computer Hacking and Intellectual Property) unit. Headed by assistant U.S. Attorney Ross Nadel, the unit has since been replicated in nine other jurisdictions. Soon, 48 federal prosecutors will be dedicated exclusively to IP crimes.
But do businesses need taxpayers to pay for their protection? "Yes and no," said Leo Cunningham, a former assistant U.S. attorney and now a partner at Wilson Sonsini Goodrich & Rosati. "The fact is that healthy businesses who have intellectual property to protect typically also have the resources to protect it.
"But, whether or not a prosecutor should get involved depends not just on the impact on a particular business that might be victimized at a particular time, but whether there is a broader public interest in prosecuting the case."
So do businesses even want protection? As Orrick, Herrington & Sutcliffe partner Gary Weiss once wrote: "The victim company risks being victimized further as a result of the criminal prosecution itself."
Weiss, who has prosecuted and defended several high-profile civil cases (including the civil counterpart to a well-known criminal case against Semiconductor Spares Inc.) said drawbacks include delays in civil matters and the risk of further exposing sensitive information.
"I would think most people would say that there is little to be gained by going to the criminal authorities," Weiss said.
When Everything Changed
Historically, IP disputes were worked out in civil courtrooms. But if there was one moment, locally, when that may have changed forever, it was the moment Keker & Van Nest partner Jeffrey Chanin walked into the Santa Clara County district attorney's office and told Assistant DA Julius Finkelstein a baffling story - that a competitor was using computer code stolen from his client, Cadence Design Systems Inc., to compete against it.
Chanin says he went to the authorities because the crime was so egregious. "For one thing, we definitely believed that this was a clear, clear case of intentional wrongdoing," he said.
But at first, Finkelstein doubted he was looking at a criminal case. Avant was a public company after all, with all the due diligence that entails.
"The idea that a company could go all the way through an IPO and the stock market with that kind of background" made him skeptical, Finkelstein said recently.
But his own investigation established "overwhelming" evidence of Avant's guilt, he said. As the case progressed, events unfolded in a way that touched on many of the issues raised by trade secret prosecutions.
The DA's office was criticized, generally, for getting involved in a dispute between two companies and, specifically, for using experts paid for by Cadence, the victim. And Cadence itself was beset by accusations from Avant.
In the end, Finkelstein prevailed. Cadence won a $195 million restitution award, which its lawyers believe bests the next highest award by a factor of 10.
What Finkelstein said after the case underscored another problem faced by Nadel, Finkelstein and others who prosecute IP crimes: He said he hoped it would inspire more businesses to come forward.
"We have to have an environment that protects intellectual property," Finkelstein said. "Investors are being asked to invest in companies that develop intellectual property. And I doubt they will continue to do so" without protection.
But the drawbacks can be many for a company seeking a trade secret prosecution: a loss of control over the case, the exposure of sensitive information, the corporate resources investigators will require and the possibility of the defense trying to put the victim itself on trial.
Finkelstein and Chanin point out one big advantage that criminal trade secret cases have over their civil counterparts - search warrants. When asked if Cadence would have discovered some of the incriminating documents at the heart of the case through discovery, Chanin laughed.
Breaking The Scale
Nadel has made it a point to contact Bay Area businesses, not only to make them aware of the unit's existence, but to allay fears they might have in coming forward.
He also has to overcome perceptions in the business community that the U.S. attorney will be indifferent to a crime unless millions of dollars are involved.
"Even if the financial loss is not that large, if the case is one that should be prosecuted in the federal system we're going to go ahead and do it," Nadel said.
However, some wonder if a run of criminal cases could actually sap the vitality of the tech economy that the feds are trying to protect.
What happens, lawyers ask, when a software engineer leaves a company for a competitor, taking with him knowledge of his former company's projects? Could that form the basis of a trade secrets criminal prosecution if the employee's new company decides to compete with old one?
The mere possibility, some say, is enough to tip the balance against employees in an area of law where lawyers say a balance has been struck in civil law. Said Cunningham: "They [criminal prosecutions] don't just alter a delicate balance. They break the scale."
The concern is that if employees are discouraged from moving from one company to another out of fear that it might set in motion a criminal prosecution, an industry's innovators - and thus innovation itself - become monopolized by a small number of companies.
"There's a flip side to that. If former employees can rip off intellectual property with impunity, then there is no reason for investment," Cunningham said.
Thomas Nolan, a defense attorney with Palo Alto's Nolan, Armstrong & Barton, is more wary than most about the criminalization of IP law.
"We haven't really gotten to the point where we understand what it is we're trying to protect," Nolan said.
Nolan is critical of the government's sometimes inherent reliance on the victim to define a trade secret. "They have to rely completely upon the integrity of the company," he said.
"It's a self-defining property. It's only intellectual property if the owner says it is. They get to define it."
The risk is that prosecutors are put to work as pawns by companies engaged in a high-stakes battle for the marketplace.
"They're very wary of doing that," Chanin said.
Nolan adds that there is another reason prosecutors pursue these cases. "The fact of the matter is, they're a lot more fun than prosecuting burglaries and murderers and rapists. And they can use them to sell themselves to large law firms."
Nevertheless, Nolan supports the formation of the CHIP units.
"I'd rather have experienced prosecutors working on these cases. I'd rather have people who won't be fooled."
Copyright's Enforcement Arm
Copyright prosecutions, the exclusive domain of federal law, present other problems.
Federal agents still seek to break up sophisticated piracy operations involving the unauthorized duplication, packaging and distribution of software, CDs, videos or other media. Federal agents in Southern California seized $100 million in pirated software last month.
But the Internet - and new laws - have blurred the line between fair use and criminal activity.
As organizations like the Recording Industry Association of America and the Motion Picture Industry Association of America become virtually obsessed with guarding against piracy, they are increasingly turning to prosecutors - and politicians - for help.
Spurred by creative industries in Southern California and Silicon Valley, lawmakers passed a series of measures in the 1990s - DCMA, the No Electronic Theft Act and the Electronic Espionage Act - aimed at high-tech piracy.
The RIAA, which brought the seminal civil suit against the online file-sharing service Napster, boasts that it was aware of at least 1,762 copyright arrests in the first six months of 2001, nearly double the previous year. And the MPAA offers a bounty for information leading to the arrest and prosecution of copyright violators.
RIAA spokesman Jano Cabrera said his organization refers criminal cases to police when they become aware of piracy. "Basically, we understand that these guys have a full-time job and we just want to help."
What Adobe did was no different. But after Sklyarov's arrest, he became more martyr than crook. Although Adobe dropped its support of the prosecution, the U.S. attorney's office is pressing ahead with charges that he created and sold a program that defeats the encryption protecting Adobe's eBook products.
As technology made duplicating copyrighted works as easy as clicking a mouse, the industry embraced encryption as a way to protect its profits.
But critics charged that Sklyarov's prosecution could establish a precedent that threatens the way encryption technology is developed - by hacking into encrypted systems and exposing their weaknesses.
Critics argue that his prosecution turns upside down the argument that IP prosecutions are necessary to protect the vitality of a high-tech economy. Cases such as Sklyarov's and Princeton computer science professor Edward Felten could end up chilling the development of new and better technologies.
Felten, at the invitation of the music industry, cracked through technology it was developing to protect music CDs. His team sought to present its findings at a conference before publishing them, when he received a threatening letter from the RIAA saying that to do so could violate the DCMA and several other federal laws.
It was enough to scare Felten. Instead of presenting his paper, he sued the RIAA and the government, seeking a declaratory judgment that he could not be prosecuted, criminally or civilly. The government filed a brief in opposition and on Wednesday, a New Jersey federal judge ruled against Felten.
"[Encryption experts] are scared now," said EFF lawyer Cindy Cohn. "And the result is that we're going to have less computer security."
Cohn suggests that the government reassess its priorities. "There's a lot of real crimes out there," Cohn said.
"What we're seeing now is that the U.S. attorney is now willing to be the enforcement arm of the copyright industry."
Others have praised the CHIP unit for selecting cases judiciously.
"I think they've gotten savvier in not trying to bring every case where people come knocking at their door," said former Assistant U.S. Attorney Kent Walker, now general counsel of Liberate Technologies. "They are appropriately looking for cases that will send a message."
Federal public defender Barry Portman said he had not seen a run of indictments for low-level copyright violations, giving credit to the U.S. attorney's office for pursuing cases against defendants who are able to help themselves to defense counsel.
But that approach also has its critics. Defense attorney Cristina Arguedas wonders why the feds would treat IP crimes differently from others, since not every one that comes to the authorities' attention is prosecuted. "It breeds contempt for the law," Arguedas said.
'A Huge Waste of my Tax Dollars'
Jason Spatafore still wonders what message the federal government was trying to send in his case, which registered barely a blip on the radar of IP law.
Spatafore, who lives in Phoenix but faced trial in San Francisco, maintains that he not only didn't know he was breaking the law, but also questions whether what he did should be a crime.
After downloading a digital version of the movie "Star Wars: Episode 1 - The Phantom Menace" from another Web site, Spatafore split it into several files and posted them on his Web site. Lucasfilm reported the piracy to the U.S. attorney.
Nadel prosecuted the case himself, and Spatafore was given two years' probation. He maintains that no cease and desist letters were sent before FBI agents showed up at his house.
"It does make you wonder whether the World Trade Centers would still be standing if the time, money and resources spent on my case would have gone toward terrorism," he said.
Anyone who downloads and hosts a protected file on a home computer could face similar prosecution under recent copyright laws eliminating the need for prosecutors to show a violator sought financial gain.
"I did what I think many others do," Spatafore said. "I know I was wrong. But, deep in my heart I think this is a huge waste of my tax dollars.
His case would seem to set a precedent for prosecuting the many computer users who put files on their hard drives as part of the file-sharing networks that ballooned in Napster's wake.
"Most people who are doing this stuff are between the ages of 10 and 17," Spatafore said. "Can you really prosecute a kid on a federal level? And, if so, do you think he's going to care when he's 18 and it's erased? The public money is being wasted in this whole issue."
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