The Economic Espionage Act: A Prosecution Update

Jul 1998

THE ECONOMIC ESPIONAGE ACT: A PROSECUTION UPDATE

by Gerald J. Mossinghoff*, J. Derek Mason**, and David A. Oblon***.

In our article in the March, 1997 issue of the Journal of the Patent and Trademark Office Society[1] we described the major provisions of the Economic Espionage Act ("EEA") and traced the legislative history leading to its enactment on October 11, 1996.[2] That act was strongly supported by the Clinton Administration and by the bipartisan leadership of the House of Representatives and the Senate, principally because of testimony that, with the end of the Cold War, foreign governments were using their espionage capability to steal valuable trade secrets of U.S. industries. We identified several areas where the interpretations of the Act would be crucial to its success in combating the theft of trade secrets from U.S. companies.

There have now been six criminal actions brought under the EEA and two convictions. There is an interlocutory appeal now pending in the Third Circuit Court of Appeals in one of the cases, United States v. Kai-Lo Hsu[3], the outcome of which, in our view, will have a pivotal effect on whether the EEA will ever be used in the future in cases to prosecute defendants who do not already actually possess the trade secrets that they are accused of stealing.

The EEA was the result of two separate bills introduced by Senator Arlen Specter (R. PA) and Senator Herb Kohl (D.WI): S.1556 and S.1557.[4] The former broadly prohibited the theft of proprietary economic information by any person, while the latter was more narrowly drawn to proscribe such thefts by foreign nations and those working on behalf of foreign nations. The essential features of S.1557, relating to "any foreign government, foreign instrumentality or foreign agent," now appear in 18 U.S.C. § 1831, and the essential elements of S.1556 appear in 18 U.S.C. § 1832. The remaining sections of the Act, §§ 1833-1839, apply to both of the two earlier sections and deal with such matters as definitions, orders to preserve confidentiality, interlocutory appeals, civil proceedings by the United States and the territorial reach of the law.

THE CASES

The PPG Case

In United States v. Worthing[5], Patrick and Daniel Worthing were indicted for allegedly stealing confidential fiberglass manufacturing and production information, valued at $20 million, from the Pittsburgh-based PPG Industries. Patrick Worthing worked at PPG under a contract with Affiliated Building Services as the supervisor of a maintenance crew at one of PPG’s research and development facilities. With access to every office, he surreptitiously collected PPG’s proprietary information, including diskettes, blueprints and other confidential research materials relating to fiberglass. Daniel reportedly agreed to help his brother in the scheme for $100. The indictment was based on an FBI sting operation prompted by a letter to Owens-Corning Fiberglass indicating that confidential PPG information could be made available to them.

Both defendants pleaded guilty, with Daniel Worthing, who cooperated with the Government, being sentenced to five years’ probation, six months of home confinement and 100 hours of community service, and Patrick Worthing now serving a 15-month prison sentence, to be followed by three years’ probation.[6]

The Taxol Case[7]

Kai-Lo Hsu, a technical director for Taiwan’s Yuen Foong Paper Company, and Chester S. Ho, a biochemist and professor at a Taiwan university, both Taiwanese nationals, were arrested by the FBI on June 14, 1997 for alleged attempts to steal trade secrets from the Bristol-Myers Squibb Company involving the production of the anti-cancer drug Taxol.[8] Although this was the first case in which the EEA was used against foreign nationals, it was brought under § 1832 of the EEA and does not involve allegations that they were working for or are agents of a foreign instrumentality. The case also involves an arrest warrant for Jessica Chan, now believed to be in Taiwan, which does not have an extradition treaty with the United States. Reportedly, the Yuen Foong Paper Company is still under investigation for possible indictment under the EEA.

Initially, Taxol required the use of the bark of the Pacific Yew tree, in which the active ingredient of Taxol naturally occurs. However, that tree has now been placed on the endangered species list and can no longer be harvested. This prompted Bristol-Myers to spend several hundred million dollars to develop a method of producing large quantities of Taxol through genetic engineering. The trade secrets in questions relate to this substitute production process. An FBI sting operation resulted in the arrest on June 14, 1997 of Hsu and Ho, with a Bristol-Myers executive posing as a corrupt Bristol-Myers scientist willing to sell Taxol production secrets to the defendants. At no time did the defendants receive either the details of the trade secret or the cell lines used to grow Taxol cultures.

On October 27, 1997, Judge Stewart Dalzell of the U.S. District Court, Eastern District of Pennsylvania, rejected the Government’s request for a broad protective order for Bristol-Myers technology documents and granted instead a far less restrictive order that was requested by the defendants.[9] The Government had urged that the Bristol-Myers technology documents be reviewed by the Court in camera and that all trade secrets be redacted. The defendants’ proposal, which the Court adopted, provided instead that Bristol-Myers production documents be made available to the defendants under a protective order that would limit disclosure to all individuals needing the documents for purposes of defense and requiring all those given access to the documents to sign an agreement binding them to the terms of that order. In rejecting the Government’s request, the Court noted:

"The Government argues with much force that "[t]he unnecessary disclosure of trade secrets is a harm that the Economic Espionage Act of 1996 explicitly instructs the courts to guard against." See Government’s Motion p. 8 (citing 18 U.S.C. § 1835). The Government can also be forgiven for not reposing much trust in defendants who it contends are linked to wrongdoers far removed from the borders of our contempt power."[10]

Nevertheless, the Court denied the Government’s motion on several grounds: (1) Granting the Government’s motion, in the Court’s view, would effectively relieve the Government of proving an essential of its case, namely, the existence of a trade secret. (2) Restricting the defendants’ right to Taxol documents would interfere with its Sixth Amendment right to cross-examination or otherwise effectively defend against the charges. (3) Defendants need to compare what the Government contends are Bristol-Myers trade secrets against what is available to the public and thus not a trade secret. (4) Trade secret protection, in the Court’s view, would be preserved because the order does not allow for disclosure to the public. Regarding point (2) and citing no less an authority than Marbury v. Madison,[11] the Court noted the "inherent tension" between the Congressional intent in enacting the EEA and the Constitution and concluded that the Constitution must prevail.

In a partial victory for the Government, the Court determined that the defense of "legal impossibility" does not apply to the EEA. Thus, a convictionfor attempt may be proven where the defendant had the specific intent to commit the crime and took a substantial step towards it commission — the traditional elements of an attempt — even if, as in the case of a FBI sting, the documents defendant attempted to steal contained "dummy" formulas.

Anticipating that a district court might order the disclosure of trade secrets to a defendant under the EEA, Congress specifically authorized the Government in 18 U.S.C. § 1835 to take an interlocutory appeal "from a decision or order of a district court authorizing or directing the disclosure of any trade secret." The District Court noted that provision and, in a footnote, stated:

"Inasmuch as this motion raises unsettled and important questions of law, we encourage the Government to seek further clarification of them from our Court of Appeals."[12]

In those instances in which a defendant does not already possess the trade secret he or she is accused of stealing, an affirmance on appeal of the District Court’s holding in United States v. Hsu, could drastically limit the effectiveness of the EEA. Business executives who believe themselves to be targets of trade secret thieves are not likely to willingly cooperate in the prosecution of the alleged thieves if the certain result is that they will be forced to turn over the trade secrets in the process, even under written promises not to disclose the trade secrets to others. However, corporations and lawyers who generally deal in intellectual property and trade secret matters need to remember that the EEA is a criminal law, and criminal rules are very different than the rules of the more familiar civil litigation. The courts, especially at the District level, may appear to bend over backwards to accommodate the defendants. But all of the protections of any other criminal law apply to the EEA; the defendants are presumed innocent, and they are presumed to be able to abide by the court’s gag order. And, perhaps most important of all, they have the right to force the Government to prove every element of the offense beyond a reasonable doubt. They have the right to cross examine and confront prosecution witnesses and evidence. And they have the right to present potentially exculpatory evidence on their own behalf.

The Taxol case presents a potential for a conflict between the Justice Department and the aggrieved party. Under criminal law, it is the Government, not the victim, that determines whether or not they will proceed with the prosecution. Thus, if the District Court ruling is upheld and Bristol-Myers is ordered to disclose its trade secrets to the defendants, it will then be the Justice Department’s decision whether to proceed with the case or not. In reaching this decision, the Government must use great discretion before agreeing to turn over Bristol-Myers’ documents to the defendants, a move that would likely be strongly opposed by Bristol-Myers.

 

The Four Pillars Case[13]

On September 4, 1997, the FBI arrested Ping Yen Yang and his daughter, Hwei Chen Yang, for allegedly stealing millions of dollars in trade secrets from the California-based Avery-Dennison Corporation. Yang is the Chairman of the Four Pillars Enterprise of Taiwan and his daughter, a Ph.D. chemist, is employed by that company. She reportedly holds dual citizenship in the United States and Taiwan.

The arrests again were part of an FBI sting operation prompted by information given Avery-Dennison by an employee of Four Pillars who was seeking a job at Avery-Dennison. He disclosed that one of Avery-Dennison’s employees, Ten Hong Lee, had been passing trade secrets concerning the manufacture of self-adhesive products to Four Pillars for several years. Actually caught in the act of rifling through confidential Avery-Dennison files by the FBI, Lee pleaded guilty to wire fraud on October 1, 1997 and cooperated with the Government in building its case against the Yangs. Federal prosecutors estimate that the research and development costs expended by Avery-Dennison to develop the information obtained by the defendants exceed $50 million.

On the day after the Yangs’ indictment, Avery-Dennison filed a civil action against Four Pillars, the Yangs and Lee in the U.S. District Court in Cleveland under the RICO Act based on the alleged thefts.[14] The Court in that case has frozen the assets of the Yangs and Lee, while the Yangs are confined to an apartment building in Cleveland under electronic monitoring.

 

The Gillette Case[15]

In a well publicized case, on September 24, 1997, a federal grand jury in Nashville, Tennessee indicted Stephen L. Davis under the EEA and wire fraud statute for attempting to sell trade secrets of the Gillette Company regarding a next generation of razor systems to its competitors, Warner Lambert Company, American Safety Razor Company and BIC. Davis is a former employee of Wright Industries, a Tennessee company that was helping Gillette design its new shaving system. He was assigned to be the lead process control design engineer. Davis allegedly used pseudonyms in his faxes and electronic mail in transmitting detailed technical drawings of the new Gillette shaving system to its competitors.

 

The Deloitte-Touche Case[16]

The U.S. Attorney’s Office in Houston, Texas brought a two-count indictment under the EEA against Mayra Justin Trujillo-Cohen, for allegedly stealing a proprietary software program — the "AFRONT for SAP" program — developed by Deloitte-Touche. According to the grand jury charges, Trujillo-Cohen converted portions of the software program, which she knew to be proprietary to Deloitte-Touche, by selling it to others for her personal benefit. This appears to be the first case in which the EEA alone is cited in an indictment; it charges no violations of other criminal statutes.

 

Atlanta Daily Post Case[17]

Carol Lee Campbell, former Circulation Manager of the Gwinette Daily Post, and Paul Edward Soucy, former District Circulation Manager of its sister paper, The Rockdale Citizen, were arrested by FBI agents on February 6, 1998 after they allegedly offered to sell marketing plans and subscription lists to the Atlanta Journal-Constitution. They were charged both with mail fraud and violation of the EEA, and have pleaded not guilty to both charges.

 

Preliminary Analysis of the Cases

Possibly because of the tension between the criminal laws and the civil nature and history of intellectual property protection in general, the Justice Department has been moving very slowly in enforcing the EEA. On its face, this seems strange. Recall that FBI Director, Louis Freeh, in supporting the Act, argued that 23 different counties were targeting U.S. trade secrets. The White House Office of Science and Technology, in supporting the Act, estimated that losses to U.S. businesses were $100 billion a year. And ABC News estimated six million job losses over this decade as a result of economic espionage.[18]

Not only are the six cases few in number, they are quite straightforward, with each stemming from an FBI sting where the Government has a great deal of control of the transaction. In each prosecution brought to date, there is no question of the defendants’ criminal intent, at least based on the Government’s allegations. In each of the cases an egregious set of facts is alleged in which the defendants — often using pseudonyms or code phrases — either blatantly offered the trade secrets of their employers for sale or tried to acquire or sell the trade secrets of another company. None of the cases involves the "general knowledge, skills and expertise" of former employees, an issue that could be troublesome in our mobile society.[19]

All of the cases have been filed under 18 U.S.C. § 1832, which does not involve a foreign instrumentality, even though in two of the cases, the Four Pillars Case and the Taxol Case, the defendants are foreign nationals. And in each case, criminal acts are alleged to have occurred in the United States, so the territorial reach of the EEA has not been tested.

Why has the Government not been more aggressive in bringing more cases? The answer is probably as simple as the Justice Department wants to work out the "bugs" in the new law and create a body of case law with lesser offenders before pursuing more serious cases under the provisions of §1832 and the extraterritoriality provisions.

Spokesmen for the Department of Justice have made it very clear that they do not see the EEA being used in a way that the Government will become a "referee" between civil litigants, but in the Four Pillars Case, the RICO action filed by Avery-Dennison is now pending along with the Government’s EEA case against the Yangs.

Moreover, in all but one case, the Government has been teaming up the EEA with other federal statutes, such as wire and mail fraud. This is basic criminal prosecution procedure. The Government overcharges, presents a strong-looking case, and then offers to trade a guilty plea for a reduction in the number of charges. In a system where the number of charges can dramatically alter the actual sentence, and the fact that the most generous plea offers are a "take it now while you can" offer, such offers are often attractive to defendants. Again, this looks like the strategy of a Justice Department that wishes to take it slow and test the water.

However, the delay in bringing cases may be the calm before the storm. The Justice Department has been talking up this new law in speeches and symposiums, and they are preparing to issue guidelines for protecting secrets. This much work indicates that they view the EEA as a priority area.

Clearly, the most significant — and in many ways the most troubling — development in the implementation of the EEA is the District Court’s ruling in the Taxol Case. If targets of economic espionage know that they will need to disclose their trade secrets to defendants accused of stealing or attempting to steal them in the first place, it will place them in a "Catch-22" situation. If the District Court’s ruling prevails, it is difficult to imagine a corporate executive who would work with the Government in an EEA prosecution in situations where the defendant does not already possess the trade secrets in question. Moreover, even if the Government prevails in its appeal to the Third Circuit Court of Appeals, it is possible that it will be able to withhold disclosure of the trade secrets to the defendants only in those cases where the allegation involves an attempt to violate the EEA, or a conspiracy to do so, and not in cases where an actual violation is charged. This, however, will greatly reduce the sentences that would otherwise be imposed upon the defendants under the uniform sentencing guidelines.[20]

If the Government is forced to disclose an alleged victim’s trade secret to a defendant, it clearly must closely weigh each case carefully on its merits and gauge the probable effects of its actions on the victims before proceeding. Where the charge, as in the Taxol case, is attempted trade secret theft and the defendants never actually obtained the trade secret information, a decision to proceed and to force the alleged victim to divulge trade secret information could result in huge economic loss to the victim, exactly the situation that Congress sought to prevent in passing the EEA in the first place.

 

Conclusion

With the six cases brought under the EEA in its first year, the Department of Justice has demonstrated its seriousness in enforcing the EEA. That number, however, is a small fraction of the number of cases the Government said it was investigating during the pendency of the EEA legislation. Thus, it remains to be seen whether the EEA — even if it survives the District Court’s Taxol ruling — will have the significant impact that its congressional supporters and the Clinton Administration predicted for it.

Published in the Journal of the Patent and Trademark Office Society, volume 80, May 1998, pages 360-368.

* Senior Counsel, Oblon, Spivak, McClelland, Maier & Neustadt, P.C. A former Assistant Secretary of Commerce and Commissioner of Patents and Trademarks, Mr. Mossinghoff is a Visiting Professor of Intellectual Property Law at the George Washington University Law School and an adjunct Professor at the George Mason University School of Law.

** Partner, Oblon, Spivak, McClelland, Maier & Neustadt, P.C. Formerly a Research and Development Chemist with a multinational chemical company, Dr. Mason holds a Doctorate in Organic Chemistry from the University of Wisconsin and a Juris Doctor from the George Washington University Law School.

*** Partner, Albo & Oblon, L.L.P. Mr. Oblon is a criminal defense lawyer in Northern Virginia. He holds a Juris Doctor from the George Mason University School of Law.


Endnotes


[1].79 JPTOS 191 (1997).

[2].P.L. 104-294; Senate Report 104-359, House Report 104-788, 104th Cong., 2nd Sess. (1996).

[3].Criminal Action No. 97-323 (E.D. Pennsylvania, filed July 10, 1997), 982 F. Supp. 1022 (E.D. Pennsylvania 1997).

[4].104th Cong., 1st Sess. (1995).

[5].Criminal No. 97-9 (W.D. Pennsylvania, December 7, 1996).

[6].Pittsburgh Post-Gazette, Friday, June 6, 1997, page C3.

[7].Supra Note 3.

[8].The Wall Street Journal, Monday, February 2, 1998, page B5.

[9].Supra Note 3.

[10].982 F. Supp. @ 1026.

[11].5 U.S. 137 (1803).

[12].982 F. Supp. @ 1022.

[13].United States v. Pin Yen Yang, Criminal No. 1:97MG0109 (N.D. Ohio, September 4, 1997); The Wall Street Journal, Thursday, October 23, 1997, page B1.

[14].Racketeer Influenced and Corrupt Organization Act, 18 U.S.C.  1961 et seq. Cleveland Plain Dealer, Sunday, October 12, 1997, page H1.

[15].United States v. Steven L. Davis (MD Tennessee. 1997). The Boston Globe, Friday, September 26, 1997, page C1.

[16].United States v. M.J. Trujillo-Cohen (CR-H-97-251, S.D. Texas, 1997), 4 Business Crimes Bulletin 4 (January 1998).

[17].United States v. Campbell (M.D. Tennessee, 1997), Editor and Publisher Magazine, February 21, 1998, page 10.

[18].79 JPTOS @ 193.

[19].See the discussion in our earlier EEA article, 79 JPTOS @ 201.

[20].United States Sentencing Guidelines, 18 U.S.C.A. Appendix.