Many companies today face the conundrum of how to protect their intellectual property rights against the high costs associated with civil litigation. As a result, many have been more willing to explore the use of the criminal justice system to protect these rights. One criminal intellectual property statute that has been applied with more frequency over the past few years is the Economic Espionage Act (EEA). The EEA is, broadly speaking, the federal criminal companion to the various state civil trade secret statutes, making it a criminal offence to steal proprietary information.

The EEA has resulted in convictions, obtained through guilty pleas, in a number of cases. A guilty plea results from a strong case in favour of the government. This usually involves a high likelihood that the information was taken and that it qualified as a trade secret. But what if those factors are in dispute? Similar to civil trade secret trials, challenging the proprietary status of the information or the misappropriation may lead to a finding of no liability – which in the criminal context of the EEA means not guilty.

Recently a jury acquitted former NetLogic Microsystems Inc engineers Lan Lee and Yuefei Ge of economic espionage and trade secret theft in one of the first jury trials of individuals accused of economic espionage (United States v Lee, ND Cal). Lee and Ge were accused of stealing the designs for a high speed computer chip from their employer and chip manufacturer Taiwan Semiconductor to set up their own company with the financial backing of a venture capital arm of the Chinese government. Lee and Ge worked for NetLogic between 2001 and 2003. They were not employees of Taiwan Semiconductor but allegedly downloaded software with some of its manufacturing secrets from an internal server at NetLogic. The two companies worked together on chip development and production. Post trial interviews with jury members and attorneys involved in the case reveal that one of the issues which appeared to divide the jury was whether the technology allegedly stolen constituted trade secrets, because it was unclear if NetLogic had taken adequate measures to protect its trade secrets.

The NetLogic case highlights the steps that a company must have undertaken in order to protect their proprietary information and increase the odds of the government obtaining a conviction under the EEA. For this reason, it is important that companies review the provisions of the EEA and follow guidelines to mitigate the risk of prosecution under the EEA for acquisition of competitive information through hiring of former employees of their competitors.

The Act

Recognising that intellectual property plays an important role in the national economy and the serious economic risks created by the theft of trade secrets, Congress enacted the EEA in 1996. Congress intended the EEA to prohibit every type of trade secret theft, "from the foreign government that uses its classic espionage apparatus to spy on a company, to the two American companies that are attempting to uncover each other's bid proposals, or to the disgruntled former employee who walks out of his former company with a computer diskette full of engineering schematics", according to a 1996 House of Representatives report.

But prosecution for an EEA violation is not limited only to when a foreign government is the beneficiary of the trade secret theft, as alleged in the NetLogic case. The EEA also prohibits the commercial theft of trade secrets carried out for economic or commercial advantage, whether the perpetrator is foreign or domestic. Of course, under either provision of the EEA, the information which was misappropriated must be a trade secret.

Section 1831 of the EEA punishes the theft of a trade secret to benefit a foreign government, instrumentality, or agent. To obtain a conviction, the government must prove beyond a reasonable doubt that (1) the defendant stole or without the owner's authorisation obtained, sent, destroyed, or conveyed information; (2) the defendant knew or believed that the information was a trade secret; (3) the information was in fact a trade secret; and (4) the defendant intended or knew that the offence would benefit a foreign government, instrumentality, or agent. In contrast, Section 1832 of the EEA punishes the commercial theft of trade secrets carried out for economic advantage, regardless of the beneficiary. To obtain a conviction under this provision, the government must prove beyond a reasonable doubt that in addition to the first three elements of Section 1831, that (4) the defendant intended to convert the trade secret to the economic benefit of somebody other than the owner; (5) the defendant knew or intended that the owner of the trade secret would be injured; and (6) the trade secret was related to, or was included in, a product that was produced or placed in interstate or foreign commerce. It is also illegal to attempt to steal a trade secret, or to receive, purchase, destroy or possess a trade secret which the defendant knew was stolen.

 Trade secret defined

The definition of a trade secret under the EEA is very broad and includes both tangible property and intangible information. It protects all forms and types of financial, business, scientific, technical, economic, or engineering information if (1) the owner has taken reasonable measures to keep this information secret; and (2) the information derives independent economic value, actual or potential, from not being generally known to or not being readily ascertainable through proper means by, the public.

The EEA's provisions are based in large part on the Uniform Trade Secret Act (UTSA). But there are several key distinctions between trade secret theft in the criminal versus civil context. The UTSA's definition is more limited in that the economic value from any disclosure or use of the information must benefit the actual persons obtaining the information, rather than the public generally. Another key distinction involves the definition of the owner of a trade secret. Under the EEA, an owner is a "person or entity in whom or in which rightful legal or equitable title, to, or license in, the trade secret is reposed". The UTSA, however, covers misappropriation of a trade secret, even by a licensee, if the trade secret is used or disclosed without implied or actual consent, and if the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use. In a situation where a licensee uses or discloses trade secret information beyond the scope of what is allowed under the licence agreement, it is unclear whether this would constitute an EEA violation.

Make the effort

The owner's effort to maintain the secrecy of the information is vital in any trade secret proceeding. Similar to civil trade secret misappropriation cases, the security measures undertaken for the EEA do not have to be absolute, but instead must be reasonable under the circumstances. The owner of the material "must assess the value of the material it seeks to protect, the extent of theft, and the ease of theft in determining how extensive their protective measures should be"(see box: Steps to trade secret safety).

While a company should implement measures such as the ones listed to keep trade secrets confidential, it is equally important that the measures be effectively managed to ensure that they will be viewed as reasonable by a trier of fact. Employees should be required to sign confidentiality agreements, but the agreement should be thoroughly explained to the employee before it is signed, and a copy should be provided to the employee so that he will have it to refer to throughout his employment. The agreement should also be carefully drafted to clearly identify what information is confidential, instead of including an overly broad proclamation that all company information is confidential.

A company should also regularly train its employees as to what information is confidential and how to handle confidential information, as opposed to only providing training at the beginning of employment. A comprehensive system for designating which documents are and are not confidential should also be implemented. Additionally, upon termination of an employee's tenure at the company, the company should review the confidentiality agreement with the employee, explaining the terms of the agreement, and have the employee acknowledge in writing that he has read and understands the terms of the agreement. Guidance should be given to the employee as to what the company considers confidential information and what information is prohibited from use in the employee's new job. Finally, if a company is concerned that the departing employee may have copied files on his computer, the company should examine the data on the computer to ensure that no confidential information has been copied or retained.

By undertaking these measures, if an employee does take trade secret information, the company will be better able to provide the government with evidence of the employee's intent to convert the trade secrets for economic benefit and to injure the right owner. Because of the government's limited resources, prosecutors are more likely to pursue cases which have clear evidence of EEA violations in contrast to cases where the evidence of the crime is more ambiguous.

Further, to qualify as a trade secret under the EEA, the information or data must have value. The economic value of the secret can be demonstrated by the circumstances of the offence, such as the defendant's asking price for the secret, or the amount of time or money that it would take to replicate the information (United States v Lange [7th Cir 2002]). Consequently, some information considered proprietary by a company, such a customer lists, will likely not qualify as a trade secret unless the customers are not known to others in the industry and could only be discovered by extraordinary efforts and substantial expenditure of time and money (see box on case law).

The dangers of disclosure

It is also important to be mindful that a trade secret can lose its protected status through disclosure, and a prosecutor examining whether to bring an EEA case will evaluate whether the purported trade secret was ever disclosed and what effect, if any, the disclosure had on the information's status as a trade secret. Disclosure through the patent and copyright processes, industry publications or conferences, internet posting, and to licensees, vendors, and third parties must be examined to determine if trade secret protection has been waived. However, disclosure to the government to assist an investigation or prosecution of an EEA case should not waive trade secret protection (United States v Yang [ND Ohio 1999]).

While there are many benefits of referring a case to the government for prosecution, a trade secret owner must also be aware of and weigh the risks of criminal referral. Once a case is in the government's hands, the company will relinquish control of the litigation process, including the power to direct the prosecution, engage in settlement negotiations, or dismissal of the case. Additionally, while a company may wish to keep secret the fact that its trade secrets were misappropriated, this is in conflict with the government's interest in the deterrent effect of publicising its prosecutions of law violators. There is also a risk that a company's confidential information will become public during the course of the criminal proceeding. The likelihood of this information becoming public is limited because pursuant to section 1835, courts must enter confidentiality orders and take other action as may be necessary to preserve the confidentiality of trade secrets (consistent with the Federal Rules of Evidence, the Federal Rules of Criminal Procedure and other applicable laws), and the government routinely invokes section 1835 to protect the secrecy of confidential information and trade secrets. However, the risk of disclosure still exists and must be weighed by the right holder before pursuing a criminal referral.

Mitigate exposure

Because the existence of a trade secret and intent are required elements in both provisions, it is clear that the EEA was not designed to restrict competition or lawful innovation even when competition relies on the know-how of former employees hired by a direct competitor (United States v Martin [1st Cir 2000]. The EEA's purpose is to "prevent those employees (and their future employers) from taking advantage of confidential information gained, discovered, copied or taken while employed elsewhere". The use of general skills or parallel development of a similar product is not a violation of the EEA. Consequently, a company will not be at risk for prosecution based on the employee's use of personal knowledge, skills, or abilities they may have developed in moving from one job to another. While a survey of published cases and indictments with EEA counts did not reveal any cases in which a company has been indicted, if a company knowingly obtains a misappropriated trade secret from another company, EEA charges could be brought.

In tandem with the institution of a programme to protect its own trade secrets, a company should also institute a compliance programme to prevent the misappropriation of trade secrets, due to the risk that its officers or employees could attempt to gain a competitive edge through the unlawful acquisition of a competitor's trade secrets. Such a programme will be beneficial to the company for a myriad of reasons, especially if an accusation of an EEA violation occurs. The Federal Sentencing Guidelines make it clear that a company's culpability will generally be determined by the company's attempts to prevent and detect criminal conduct prior to an offence being committed, the involvement or tolerance of the offence by company officials, and what the companies did after an offence has been committed. Consequently, a company should appoint high-level personnel to oversee its compliance programme.

Since there is a high risk that new employees could bring sensitive information into a company from their past employer, special emphasis should be placed on compliance within a company's human resources department. A review of an applicant's exposure to trade secrets should be undertaken before he or she is hired. This review should not delve into any specifics about the information, but should be limited to the general categories of information to which the applicant has been exposed. It should be repeatedly emphasised to the applicant that the company does not want to know the trade secrets of the applicant's former employers. A review of the applicant's nondisclosure agreement should be undertaken to further emphasise the company's disinterest in the trade secrets for the prospective employee's past employers. Upon hiring, the message of the company's disinterest in its competitor's trade secrets should be repeated, and the new employee should be warned against sharing trade secrets from his or her past employers with any of his new colleagues.

Educate to prevent

Human resources should also provide ongoing education programmes about trade secret confidentiality that employees owe to the company and to all of their former employers. Trade secret training should include a review of the significant criminal and civil liability that attaches for failure to comply with the law. The training should also be practical and include how to identify potential issues and the proper resolutions so that employees are enabled to act appropriately if confronted with such situations. Employees who are involved in a company's competitive intelligence activities should be especially targeted for training so that the standards for determining lawful versus unlawful activities are clear.

As with the programme to protect its own trade secrets, a company should also institute a system which encourages employees and agents to notify management of any violations or inappropriate activities without any negative ramifications for the person making the report. Because the person will likely be providing information about another person with whom they work or to whom they report, the independence of the report mechanism is key and the system should be managed by someone from the company's legal department or human resources department. Further, the company must be consistent in disciplining those employees who steal or accept a competitor's trade secrets through suspension or dismissal, notification to the trade secret owner of the theft, and notification to law enforcement authorities when appropriate. The message must be clear that noncompliance is unacceptable.

PHAM & ASSOCIATES

(Managing Intellectual Property – March 2010)