The Economic Espionage Act: Federal Protection For Corporate Trade Secrets

Mar 1999

THE ECONOMIC ESPIONAGE ACT:
FEDERAL PROTECTION FOR CORPORATE TRADE SECRETS

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

© 1999

With the enactment in 1996 of the Economic Espionage Act[1] ("EEA"), the Federal Government has moved aggressively into the protection of private property rights in trade secrets. The overriding reasons behind the enactment of the legislation were the fully documented efforts of foreign governments to gain access to the trade secrets of U.S. companies, particularly in the high-tech and computer industries, in order to advance the economic interests of their private sector. However, the EEA is not limited to enforcement against foreign governments, or even foreign-based companies. It applies as well to any typical trade secret dispute involving purely domestic concerns. With fines up to $5,000,000 and imprisonment of up to 10 years for the domestic theft of trade secrets, the EEA provides a new and very powerful intellectual property regime that extends well beyond the U.S. borders. This article will briefly review the legislative history of the EEA, compare its provisions with existing, more traditional, protection of trade secrets, discuss the criminal law aspects of the EEA, and provide an update on the cases that have been brought to date under the EEA.

ECONOMIC ESPIONAGE AND THE NEED FOR FEDERAL LEGISLATION

Two major hearings were held in 1996 to consider the need for Federal legislation to prevent the theft of trade secrets as a result of economic espionage. The lead witness in both hearings was the Honorable Louis J. Freeh, Director of the Federal Bureau of Investigation ("FBI"). He was supported in his conviction that new Federal legislation was needed by a number of industry leaders representing principally Silicon Valley and aerospace companies. The organized intellectual property bar did not play a role in the hearings themselves although, since the 1970's, the American Bar Association Section of Intellectual Property Law favored "the enactment of a federal criminal law applicable in appropriate circumstances to the misappropriation of trade secrets."[2]

The hearings amply documented the two major underpinnings of the legislation:

(1) Foreign powers, through a variety of means, are actively involved in stealing critical technologies, data and information from U.S. companies or the U.S. Government for the economic benefit of their own industrial sectors.[3]
(2) Laws then on the books — including the Interstate Transportation of Stolen Property Act and the Mail Fraud and Fraud by Wire statutes — were of virtually no use in prosecuting acts of economic espionage.

With respect to point (1), Director Freeh reported that the FBI was then investigating allegations of economic espionage conducted against the United States by no less than 23 different countries. Those targeted covered the entire spectrum of successful U.S. high-technology industries.[4]

With respect to point (2) — i.e., the inadequacy of then-existing Federal statutes — Director Freeh cited the Supreme Court's Dowling ruling[5] that trade secrets did not constitute physical "goods, wares or merchandise," and that the 1930's Interstate Transportation of Stolen Property Act[6] was not applicable to economic espionage. Similarly, the Mail Fraud statute[7] would only apply to economic espionage involving the use of the mail, and the Fraud by Wire[8] statute requires an intent to defraud as well as the use of wire, radio or television.

State laws protecting trade secrets were likewise determined to be inadequate. As concluded by the Senate Judiciary Committee:

"What State law there is protects proprietary economic information only haphazardly. The majority of States have some form of civil remedy for the theft of such information — either adopting some version of the Uniform Trade Secrets Act, acknowledging a tort for the misappropriation of the information, or enforcing various contractual arrangements dealing with trade secrets. These civil remedies, however, often are insufficient. Many companies choose to forgo civil suits because the thief is essentially judgment proof - a young engineer who has few resources - or too difficult to pursue - a sophisticated foreign company or government. In addition, companies often do not have the resources or the time to bring suit. They also frequently do not have the investigative resources to pursue a case. Even if a company does bring suit, the civil penalties often are absorbed by the offender as a cost of doing business and the stolen information retained for continued use. Only a few States have any form of criminal law dealing with the theft of this type of information. Most such laws are only misdemeanors, and they are rarely used by State prosecutors.

* * * *

A Federal criminal law is needed because of the international and interstate nature of this activity, because of the sophisticated techniques used to steal proprietary economic information, and because of the national implications of the theft. Moreover, a Federal criminal statute will provide a comprehensive approach to this problem - with clear extraterritoriality, criminal forfeiture, and import-export sanction provisions."[9]

The Federal EEA was seen as a complement to the two-centuries-old patent and copyright laws:

"For many years federal law has protected intellectual property through the patent and copyright laws. With this legislation, Congress will extend vital federal protection to another form of proprietary economic information - trade secrets. There can be no question that the development of proprietary economic information is an integral part of America's economic well-being. Moreover, the nation's economic interests are a part of its national security interests. Thus, threats to the nation's economic interest are threats to the nation's vital security interest."[10]

Given the importance of the EEA as part of this triad of Federal laws protecting intellectual property, it is important for business executives and their counsel to have a thorough understanding of it and its relationship to "traditional" trade secret protection.

 

THE EEA COMPARED WITH "TRADITIONAL" TRADE SECRET PROTECTION

Five years after a landmark decision by the U.S. Supreme Court holding that the U.S. patent laws did not preempt state protection of corporate trade secrets[11], the ABA Special Committee on the Uniform Trade Secrets Act approved, and recommended for enactment in all states, the Uniform Trade Secrets Act ("UTSA")[12]. While most states have enacted the UTSA in some form, the trade secret protection granted in each state is far from uniform relative to the other states. This often leads to the result that the ability to recover for theft of a trade secret becomes a choice of law or contract interpretation question.

Before looking at the differences between the EEA and the UTSA[13], it is important to note that there are other Federal criminal statutes relating to trade secrets. In particular, 18 USC § 1905 prohibits the unauthorized disclosure of confidential information by any officer or employee of the U.S. government, or any department or agency, when that information has been received in the course of employment or official duties, unless the disclosure is authorized by law.[14] That law is of special importance to high-technology companies doing business with the Federal Government.

The EEA amends Title 18 of the United States Code by adding new chapter 90, §§ 1831 1839. This Act has two primary thrusts: (1) prevention of trade secret theft by a foreign government agent or instrumentality (hereinafter "foreign entity") or person acting on behalf of a foreign government or entity[15] and (2) general protection from theft of trade secrets by anyone.[16]

Definition of "Trade Secret"

Implicit within both section 1831 and 1832 is the definition of "trade secret."[17]

In the House Report, the House noted that the definition of trade secret in the EEA is based on the definition used in the UTSA.[18] However, in the EEA, Congress has more explicitly listed a variety of types of information, and means for storage of that information, that are not explicitly set forth in the UTSA. In so doing Congress has attempted to update the definition of "trade secret" to keep pace with growing technology, especially in the computer and information storage sectors.[19]

Further, and more importantly, the EEA specifies two conditions which must be met in order for information to qualify for protection as a trade secret under the Act. Once again these requirements mirror the two requirements present in the UTSA, but with one major difference. In the EEA definition, the information must have actual or potential independent economic value from not being generally known to or readily ascertainable through proper means by the public. However, the UTSA is more limited in its corresponding provision by requiring that the person or persons obtaining the information by improper means must be one who can obtain economic value from disclosure or use of that information.

When a foreign government or entity is involved in the trade secret theft, the EEA covers any benefit obtained by the misappropriation of the trade secret, not just an economic one. If the theft is wholly a domestic affair, the theft must convey an economic benefit on the recipient. Accordingly, in the domestic case, "a person who discloses a trade secret, but who does not intend to gain economically from it, or intends that some other person economically gain from [it], cannot be charged" under the EEA.[20]

In addition, in the domestic situation, the government must show that the defendant knew, or was aware with practical certainty, that his conduct would disadvantage the rightful owner of this information.[21] Thus, the EEA provides for considerably broader protection for trade secrets that are of international interest, compared to trade secrets that are purely domestic in their reach.

Definition of "Owner"

Another important difference between the EEA and the UTSA is in the definition of an "owner" of a trade secret. The EEA defines "owner" as a "person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed."[22] The UTSA, however, covers misappropriation of a trade secret, even by a licensee, if the trade secret is disclosed or used 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.[23] Since most license agreements contain confidentiality clauses, the UTSA would appear to cover situations of disclosure of a trade secret by a licensee within its definition of misappropriation.

This appears to leave exposed the situation where a licensee uses or discloses trade secret information beyond the scope allowed in the license agreement. While these situations could be just as damaging to the rightful owner (licensor) as theft by a non-licensee, it is not at all clear whether such situations could be prosecuted under the EEA. In view of this, licensors of trade secrets should consider including in any license agreement a section that clearly defines which party is the "owner" of the proprietary information being licensed, and any improvements thereon, as the term "owner" is defined in the EEA.[24]

EEA Sanctions

The EEA provides several types of penalties for a violation including imprisonment, fines, criminal forfeiture and injunctive relief.[25] Injunctive relief may be obtained by the Attorney General in a civil action to enjoin violation of the EEA.[26] However, this right is reserved to the Federal Government.[27] Such civil action must be brought in a U.S. district court, as they have original exclusive jurisdiction over civil actions under the EEA Section 1836.[28]

By contrast the UTSA only provides civil remedies, such as punitive damages and injunctive relief, along with actual damages and damages for unjust enrichment.[29]

One limitation included in the EEA concerns the applicability of the law to conduct outside the U.S. Since many U.S. corporations have assets and operations overseas, what happens if the theft occurs outside the boundaries of the U.S.? Section 1837 addresses the extraterritoriality of the EEA and provides that the EEA applies to conduct outside the U.S. only if (1) the offender is (a) a natural person who is a citizen or permanent resident of the U.S. or (b) an organization organized under U.S. or state laws (or a political subdivision thereof) or (2) an act in furtherance of the crime was committed in the U.S. This stretches extraterritoriality about as far as possible. Thus, the EEA does not appear to protect U.S. corporations having places of business outside the U.S., when the offender is a foreign national and the act takes place in any foreign country. The "take home" message of section 1837 is that trade secrets should be closely guarded at all times, but especially when those trade secrets are being used, or are located, outside of U.S. boundaries.

Preemption 

Contrary to the preemption provisions of the UTSA, the EEA states:

"This chapter shall not be construed to preempt or displace any other remedies, whether civil or criminal, provided by United States Federal, State, commonwealth, possession or territory law for the misappropriation of a trade secret..."(emphasis added)[30]

Additionally, the EEA allows for the lawful disclosure of information under the Freedom of Information Act.[31]

"General Knowledge, Skills and Expertise" 

Probably the most troublesome feature of the EEA relates to its applicability in instances in which an employee of company X, having knowledge of company X trade secret information, changes jobs to work for competitor company Y. When the employee performs work for company Y using skill and knowledge obtained during employment at company X, is the employee in violation of the EEA? How can company X protect itself from loss of its trade secrets? Conversely, how can the employee be expected to forget what he has learned when going to work for company Y? The problem is that the employee cannot simply forget the trade secrets of company X and must therefore attempt to compartmentalize the various bits of knowledge and expertise gained while in the employ of company X.

Early versions of the EEA included a passage stating that "knowledge, experience, training or skill that a person lawfully acquires during their work as an employee or independent contractor" for another person was not included in the term "proprietary economic information."[32] This provision was later removed and the term "proprietary economic information" changed to "trade secret."[33] The legislative history indicates that the EEA is not intended to be used to prosecute persons who use generic business knowledge to compete with former employees. The House Report states:

"...under the new offense, the government is required to prove that the defendant has wrongfully copied or otherwise exerted control over a 'trade secret.' The definition of trade secret requires that the owner of the information must have taken objectively reasonable and active measures to protect the information from becoming known to unauthorized persons."[34]

Unfortunately, this still leaves an employee in a dilemma as to what among his business/technical knowledge is considered "general knowledge" and what is over the line and classified as a "trade secret." Further it leaves company Y in the difficult position of hiring the employee for his knowledge and expertise and then having to tell him that he can only use portions of it, thus potentially limiting his effectiveness on the job, or limiting his job mobility.[35]

THE ECONOMIC ESPIONAGE ACT IS A CRIMINAL LAW: CRIMINAL LAW AND PROCEDURE APPLY

Employees and Businesses need to be aware of the important difference between the EEA, which is truly a criminal law, and civil suits. Unlike civil suits, the FBI will handle the investigation, and United States Attorneys will prosecute the alleged offenders. Thus, companies otherwise without resources to support litigation now may be able to enlist the help of the federal government to protect their trade secrets. And the Speedy Trial provisions of the Sixth Amendment means that these cases will be resolved significantly faster than most civil disputes. These cases should take approximately one year to prosecute. Of course, those accused of violating this Act enjoy the usual Constitutional protections. Moreover, to convict, a jury must find an accused guilty "beyond a reasonable doubt" as compared with the much lower "preponderance of evidence" standard of civil trials.

The legislation itself directly contains sections promoting the victim's interests. For example, courts must take all "necessary and appropriate" measures to preserve the confidentiality of the relevant trade secrets in a criminal or other proceeding under the EEA.[36] If a District Court ignores the statute's confidentiality requirement and authorizes the material's disclosure, the United States may take an interlocutory appeal.[37]

The EEA contains victim compensation provisions which allow the government to confiscate any property used to commit a crime, as well as proceeds generated from the theft.[38] Courts may then award this property to victims. The Department of Justice has an agency policy of providing restitution to victims where possible; accordingly, the EEA affords victims priority when distributing the forfeited property.[39] The fines, however, will be retained by the government. It is not hard to imagine a case where heavy fines will impoverish a defendant, making restitution impossible and an victim business uncompensated. The fines could also render a civil, companion-trial moot for the same reason.[40]

Perhaps the biggest adjustment business executives will have to make concerns the shift of power from the victimized business to the prosecutor. In all criminal prosecutions the prosecutor - not the victim -- is in control. Consequently, victim businesses will lack the power to direct the prosecution, engage in negotiations, or even dismiss the case. Recently, the California Supreme Court disqualified a district attorney's office because the prosecutors received funding from a "victim business" to help defray prosecution costs.[41] As noted below, the U.S. Court of Appeals for the Third Circuit expressed serious concern over the involvement of Bristol Myers Squibb personnel with the prosecution attorneys from the Justice Department in the Taxol case. Businesses who are used to relying on their own counsel, whether in-house or a law firm, will have to learn to deal with "strangers" from the U.S. Attorney's office, and their control and input into the case will be sharply limited.

Penalties under the Economic Espionage Act

Violations of this new law should cause most business executives to gasp. The following chart highlights the maximum fines and prison sentences available under the EEA.

Section 1832 Penalties (Domestic Economic Espionage)

  Maximum Jail Sentence Maximum Fine
Individual Criminal Liability 10 years $250,000
Corporate Criminal Liability N/A $5,000,000

Section 1831 Penalties (Economic Espionage Benefitting a Foreign Country)

  Maximum Jail Sentence Maximum Fine
Individual Criminal Liability 15 years $500,000
Corporate Criminal Liability N/A $10,000,000

 

Enforcement Priorities of the Department of Justice

 

As a result of concerns that enforcement of the EEA could result in the punishment of innocent competitors embroiled in standard trade secret disputes, Attorney General Janet Reno announced that, for the first five years after enactment, all EEA complaints must be reviewed and approved at the highest levels of the Department of Justice before any charges are filed.[42] This also requires that all "prosecutions [will] continue to be approved and diligently supervised by the Executive Office of the United States Attorney."[43] Under this policy, only three officers can authorize a prosecution under the EEA: the Attorney General, the Deputy Attorney General, or the Assistant Attorney General for the Criminal Division.[44] Any case that goes forward without prior approval must be reported to the Senate and House Judiciary Committees, and sanctions may be imposed on the attorneys involved.[45] Moreover, the Department of Justice will prosecute all cases arising under this law. Overlaying the EEA with these procedural "safeguards" insures that any charges filed under the EEA will receive close scrutiny. At the same time, it introduces a political dimension to this "white-collar" criminal statute.

UPDATE ON EEA CASES

To date there have been 11 cases brought under the EEA, with six resulting in guilty pleas. A recent report noted that the FBI is currently investigating approximately 800 EEA cases.[46]

The Cases

The Cyrix Case

In the Eastern District of Texas, two men, Brian Russell Pringle and Steven Craig Hallstead of Computer Solution Specialists in Anaheim, Cal., have been charged with theft of trade secrets, conspiracy to steal trade secrets and interstate transportation of stolen goods in the theft and attempt to sell five prototype "Slot II" computers by Intel to the Cyrix Corporation, a computer chip manufacturer in Richardson, Texas.[47] Using an internet ad, Pringle and Hallstead allegedly advertised the availability of these five prototype Intel CPUs. Working with the FBI, Cyrix and Intel arranged for Pringle and Hallstead to bring the CPUs to the Cyrix location in Texas for Cyrix personnel to inspect and hopefully purchase. Once the CPUs were identified as the five stolen from Intel in California, Hallstead and Pringle were arrested. Each of Hallstead and Pringle has pled guilty and await sentencing. They each face up to 10 years in prison, a $250,000 fine or twice the amount of loss to the victim Intel, and three years of supervised release.

 

The Idexx Case

In a case described by the FBI as a straightforward theft of trade secrets case with a computer-age twist, Caryn L. Camp and Stephen R. Martin were charged with conspiracy to steal trade secrets, wire fraud, mail fraud, conspiracy to transport stolen goods and interstate transportation of stolen goods.[48] Camp and Martin stand accused of conspiring to steal proprietary information related to a veterinary test kit developed by Idexx Laboratories of Maine. Camp, an Idexx employee, had allegedly applied via internet for a job with Martin in California. Prosecutors say that Camp used e-mail, the Postal Service and commercial carriers to send Idexx documents covering the test kit and business information such as customer lists and sales reports to Martin. Ultimately, it was this use of e-mail that led to Camp and Martin getting caught, as Camp misdirected an e-mail message intended for Martin to a co-employee at Idexx. According to the 15-count indictment, the message stated:

"They know I've been stealing, so to speak, from the company and sending info to someone. Can I go to jail for this? I am so scared. At least your whole name's not mentioned, nor your company. So I guess it could be worse. But I don't think by much."

Martin's companies, described as Wyoming DnaVaccine and Maverick Technologies according to the indictment, apparently have no employees or assets. Thus, Camp's attorney, Thomas Connolly (also Democratic candidate for Governor of Maine) has questioned Martin's ability to use any information he allegedly received from Camp. The U.S. Attorney notes that no Idexx trade secrets ever reached Idexx competitors. Camp and Martin have each pled not guilty to the charges.

The Deloitte-Touche Case

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 proprietary software — the "4FRONT for SAP" and "FASTRACK 4SAP" programs — developed by Deloitte-Touche.[49],[50] According to the grand jury charges, Trujillo-Cohen, a former Deloitte-Touche employee, converted portions of the software programs, which she knew to be proprietary to Deloitte-Touche, by selling it to others for her personal benefit. This was later amended to include one count of mail fraud under 18 USC 1343.

In a plea agreement, Trujillo-Cohen pled guilty to one count under the EEA and one count of mail fraud. She was sentenced to concurrent terms of 48 months in prison on each of the EEA and mail fraud counts, followed by 3 years of supervised release. In addition, she was ordered to pay restitution in the amount of approximately $337,000 payable in full immediately.

The PPG Case

In United States v. Worthing, 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.[51] 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 sentenced to a 15-month prison sentence, followed by three years' probation.[52]

The Taxol Case

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.[53],[54] 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.

The trade secrets in question relate to a new process for the production of Taxol by genetic engineering. 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. While at no time did the defendants gain possession of either the details of the trade secret or the cell lines used to grow Taxol cultures, the defendants did review documents purportedly containing the trade secrets during the sting operation, while in the presence of FBI undercover personnel and the Bristol Myers executive.

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.[55] 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.

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 its 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.

On June 10, 1998, the Government's interlocutory appeal of this ruling was heard by the United States Court of Appeals for the Third Circuit.[56] The Court upheld the District Court ruling that the defense of "legal impossibility" is not available for the charge of attempted theft of trade secrets, conspiracy to steal trade secrets or conspiracy. However, in the most important issue regarding the necessity to produce the unredacted trade secret documents to the defense, the Court remanded the issue to the District Court for further determination. However, the Court of Appeals did note:

"As an initial matter, we note that we are skeptical of the materiality, let alone relevance, of the redacted trade secret information to these issues....However, we will not address defendants' claim of need for the redactions as to any other defense or aspect of the case for two reasons. First, the defendants never raised the materiality of the redacted information as to any other defenses before the district court, and the court never addressed these other arguments in its opinion....If the defendants raise before the district court the additional arguments that they have urged on appeal, we would expect the district court to conduct an in camera review to determine whether the documents have been properly redacted to exclude only confidential information and to assess whether what was redacted is "material" to the defense."[57]

On remand, the District Court held a hearing regarding the redacted documents.[58] At that hearing, the Court discovered that much of the information purported to be trade secret by Bristol Myers, while not public at the time of the original redactions, had since become publicly known by virtue of the publication of a European patent application by Phyton (a partner of Bristol Myers in the development of the Taxol process) and the issuance of U.S. Patent 5,407,816 assigned also to Phyton. Also elaborated in that District Court hearing was the fact that the Government had originally left the task of redacting the trade secret information from the documents to be used as exhibits by the Government, but the Government had provided no guidance or ground rules on the information to be redacted and had not reviewed the redactions made by Bristol Myers personnel. As a result of the Court's displeasure, the parties were ordered to confer and devise a plan for determining whether the information in the documents to be used by the Government was a trade secret or in the public domain. The plan requires Bristol Myers to provide a listing of all public documents it will rely upon to determine what is in the public domain. At that point the Defense will be able to provide additional public documents it wishes to have considered in the redaction process.

This case is set for trial in April, 1999.

The Four Pillars Case

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.[59] 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. Trial has been set for March 18, 1999.

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.[60] 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 civil case has been stayed by the Court in Cleveland, pending resolution of the EEA criminal case. In a recent twist, Four Pillars has filed a civil suit of its own against Avery-Dennison in China, alleging theft of Four Pillars' trade secrets by Avery-Dennison.

The Gillette Case

In a well publicized case, on September 24, 1997, a federal grand jury in Nashville, Tennessee indicted Stephen L. Davis for five counts each under the EEA and wire fraud statutes 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.[61] 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.

In April, 1998, Davis pled guilty to five counts under the EEA and was sentenced to concurrent sentences of 27 months for each count, followed by 3 years of supervised release. In addition, Davis was ordered to pay restitution of $508,575 to Gillette and $762,576 to Wright Industries. The mail fraud counts were all dismissed.

Atlanta Daily Post Case

Carol Lee Campbell, former Circulation Manager of the Gwinette Daily Post, his wife Susan Campbell, 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 for the sum of $150,000.[62] At the time of the offense, the Post and the Journal-Constitution were involved in litigation over who had the rights to publish legal notices for Gwinnett County. They were charged both with mail fraud and violation of the EEA. Soucy pled guilty to conspiracy to steal trade secrets under the EEA and was sentenced to 3 years probation and to pay fines and restitution totalling $1600. Carroll Campbell pled guilty to one count of conspiracy to steal trade secrets and was sentenced to 3 months in prison, 4 months of home confinement with electronic monitoring, then 3 years of supervised release, and ordered to pay $2800 in restitution and fines. The remaining counts against Soucy and C. Campbell, and all counts against S. Campbell, were dropped.

The Joy Mining Case

John Fulton, a former employee of Joy Mining Machinery Inc., was charged with attempting to buy proprietary schematic designs for an MS-14 model of a chock interface unit, an electronic switchbox that operates components of a coal mining machine known as a longwall shearer, produced by Joy Mining.[63] Fulton pled guilty to violation of the EEA and was sentenced to 5 years probation with 12 months of home detention with electronic monitoring.

The Wilsonart Case

In May, 1998, David T. Krumrei was charged with theft of trade secrets in the District of Hawaii.[64] While employed with Vactec Coatings, Krumrei learned about a proprietary process owned by Wilsonart International, Inc. involved in the production of high pressure laminate products. Krumrei is alleged to have attempted to sell this information, worth several million dollars, to a Wilsonart competitor in Australia. Wilsonart was alerted to the actions of Mr. Krumrei when the competitor contacted Wilsonart to inform them that Krumrei was attempting to sell the information. Wilsonart then worked with the FBI to set up a sting operation by arranging a meeting with Krumrei in Hawaii to exchange the information and money. Krumrei was arrested at that meeting and charged under the EEA. The case has since been transferred to the U.S. District Court for the Eastern District of Michigan where the case is set for trial in early 1st quarter 1999.

The Roche Case

Huang Dao Pei, a former scientist working on various biotech products with the special projects group at Roche Diagnostics, has been charged with attempting to acquire proprietary information on Roche's hepatitis C diagnostic kit for use in developing a similar product at LCC Enterprises of China, where Pei is Vice President.[65] Pei, a naturalized U.S. citizen born in China, allegedly contacted a scientist from Roche to acquire the information. However, unknown to Pei, the scientist was cooperating with the FBI in a sting operation and secretly tape-recorded Huang. The FBI has declined to say whether Pei was working for the Chinese government, but to date, the only charge is under 18 USC 1832, indicating that the evidence amassed at this time does not support involvement of the Chinese government. Pei has been released on $100,000 bond pending trial.

CONCLUSION

When the EEA was being considered by the Congress, its supporters went so far as to compare it in importance in protecting corporate intellectual property to the 200-year-old U.S. patent and copyright systems, a comparison that, based on the number of prosecutions to date, we view as a clear political overstatement. But the EEA was enthusiastically passed by Congress and signed by President Clinton with great fanfare -- all for the best public policy reasons. The word out of the FBI was (and still is) that hundreds of cases are being investigated. But there have been only 11 actual prosecutions during the two and one-half years since it was signed, with the majority of these being brought against what can only be described as petty criminals -- although the potential damage to the victims was substantial. None of these cases has formally involved a foreign instrumentality, the fear of which was the driving force behind the act. The most troublesome case is the Taxol case, which still has the potential of throwing a monkey-wrench into the EEA machinery. Thus, as significant as the EEA may be in the long run, U.S. trade secret owners must -- appropriately in our view -- continue to rely on traditional state trade secret law.

Published in The Computer Lawyer, volume 16, March 1999, page 14.

* 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.

** Senior Counsel, Oblon, Spivak, McClelland, Maier & Neustadt, P.C. A former Assistant Secretary of Commerce and Commissioner of Patents and Trademarks, Mr. Mossinghoff teaches intellectual property law at the George Washington University Law School and at the George Mason University School of Law.

*** Partner, Albo & Oblon, L.L.P. Mr. Oblon is a criminal defense lawyer based in Northern Virginia. He holds a Juris Doctor from the George Mason University School of Law. He gratefully acknowledges his law clerk, Allison Burton, for her assistance in the preparation of this article.


ENDNOTES


[1] P.L. 104-294. In signing the Act on October 11, 1996, the President stated that...

"This Act is an outstanding example of my Administration, the Congress, and the business community working together to provide law enforcement with the tools to combat the problems of economic espionage and trade secret theft."

For previous articles on the EEA by the present authors, see Journal of the Patent and Trademark Office Society (JPTOS), Vol. 79, p. 191 (1997) and 80 JPTOS 360 (1998).

[2] Resolution 18 (1978) of the American Bar Association Patent, Trademark and Copyright Law Section. At its June 1996 meeting, following a thorough discussion of S.1556 and S.1557, the Intellectual Property Law Section approved the following resolution by a vote of 46 to 28:

"Resolved, that the Section of Intellectual Property Law favors in principle the enactment of federal legislation which provides criminal penalties for theft or other wrongful appropriation of trade secrets for the benefit of a foreign government, with penalties and enforcement mechanisms which are proportionate to the seriousness of the offense in question; and Further Resolved, the Section opposes a limitation of such legislation to theft of trade secrets owned by U.S. nationals, the inclusion in such legislation of a prohibition of future export/import activities by convicted persons, mandatory forfeiture of property used in the offense which is disproportionate to the use of such property in the offense, authority to conduct wiretapping in investigating such offenses, and making such offenses predicate offenses under the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. 1961 et seq.)"

Section of Intellectual Property Law, American Bar Association, Annual Report 1995-1996, pages 371-378.

[3] Apparently, this is a two-way street. As reported by Peter Schweizer in the January-February 1996 issue of Foreign Affairs, Vol. 75, page 10:

"French Interior Minister Charles Pasqua summoned U.S. Ambassador Pamela Harriman to his office on January 26 of this year to protest U.S. spying on French commercial and technological developments. According to Le Monde, CIA agents flush with 500-franc notes tried to bribe a member of the French parliament to reveal France's negotiating position on the nascent World Trade Organization. A senior official in the Ministry of Communications was offered cash for intelligence on telecommunications and audiovisual policy. A technician for France Telecom, the national telephone network, was also approached. All three immediately notified the French Directorate of Territorial Surveillance, which ordered them to play along with the Americans and lay a trap."

[4] According to Director Freeh,

"The industries that have been the targets in most cases of economic espionage and other collection activities include biotechnology; aerospace; telecommunications, including the technology to build the National Information Infrastructure; computer software and hardware; advanced transportation and engine technology; advanced materials and coatings, including 'stealth' technologies; energy research; defense and armaments technology; manufacturing processes; and semiconductors."

House Hearing, Statement of FBI Director Freeh.

[5] Dowling v. United States, 473 US 207 (1985).

[6] 18 USC §2314.

[7] 18 USC §1341.

[8] 18 USC §1343.

[9] Senate Report 104-359, 104th Cong., 2d Sess. (1996), referred to herein as the "Senate Report," pages 11 and 12.

[10] House Report No. 104-788, 104th cong., 2d Sess. (1996), referred to herein as the "House Report," page 4.

[11] Kewanee Oil Co. v. Bicron Corp., 416 US 470, 181 USPQ 673 (1974).

[12] A review of the UTSA may be found in Milgrim on Trade Secrets, by Roger M. Milgrim, Matthew Bender, New York, Vol. 1, Chapter 1, Release #54 (1996).

[13] The states have adopted various versions of the UTSA; however, a state-by-state analysis of differences between those state laws and the EEA is beyond the scope of this article. Accordingly, the comparison will be drawn to the UTSA approved in 1979 and used as a model for the various individual states.

[14] This statute must be balanced against the Freedom of Information Act ("FOIA"), 5 USC § 552, since information received by government agencies is publicly available under FOIA, unless the information falls under one of the exemptions to FOIA, such as "trade secrets and commercial or financial information obtained from a person, privileged or confidential," 5 USC § 552 (b)(5).

A further criminal statute affecting intellectual property is provided by the Anticounterfeiting Consumer Protection Act of 1995 which provides for seizure of goods bearing counterfeit trademarks and substantial criminal fines for each instance of counterfeiting.

[15] In the EEA, § 1831 requires substantial ownership, control, sponsorship, command, management, or domination of an entity by a foreign government to be a "foreign instrumentality."

[16] 18 USC §§ 1831 and 1832, respectively.

[17] As defined in § 1839, a trade secret means:

"...all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically or in writing if-
(A) The owner thereof has taken reasonable measures to keep such information secret; and
(B) The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public." (emphasis added) 18 USC § 1839 (3)

[18] The UTSA defines "trade secret" as:

"...information, including a formula, pattern, compilation, program, device, method, techniques or process, that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy," UTSA, § 1(4).

[19] For example, the EEA states that trade secrets include tangible or intangible information, regardless of whether or how that information is stored, compiled or memorialized. 18 USC § 1839.

[20] House Report, p. 11.

[21] Ibid.

[22] 18 USC § 1839(4).

[23] UTSA,§ 1(2)(ii)(B)(II).

[24] Sample wording for such a clause might read:

"Licensor shall remain the owner of any and all trade secrets and other proprietary information transferred to Licensee under the terms of this license, and any improvements thereon, as the term 'owner' is defined in 18 USC §§ 1831-1839."

[25] The final version of the EEA reduced some of the penalties found in earlier versions of the bill, by dropping restrictions on import/export activities by convicted persons, reducing maximum prison terms and softening the forfeiture provisions to preserve judicial discretion and be proportionate to the use of the property in the offense. These reductions in penalties reflect some of the concerns raised by the Intellectual Property Law Section of the ABA, although wiretapping and racketeering provisions were maintained in the final bill. See note 5, supra.

[26] 18 USC § 1836(a).

[27] I.e., private company A cannot sue private company B for violation of the EEA.

[28] 18 USC § 1836(b).

[29] UTSA: §§ 2 (Injunctive relief) and 3 (Damages). Forfeiture/seizure of goods is also provided by 15 USC § 1116 and the Anticounterfeiting Consumer Protection Act of 1995 for trademark counterfeiting violations.

[30] 18 USC § 1838.

[31] Ibid.

[32] Senate Report, p. 2, § 1831(2).

[33] House Report, p. 2.

[34] Id. at p.7

[35] Suggestions for how to resolve this dilemma were provided in our 1997 paper, 79 JPTOS 191 (1997).

[36] 18 USC § 1835.

[37] Ibid.

[38] 18 USC § 1834(a)(1)&(2).

[39] Statement of Sen. Leahy (D.VT), Congressional Record (Senate), page S12213 (Oct. 2, 1996).

[40] The Act does not preempt other civil actions, such as state tort or contract claims, regarding trade secret misappropriation. 18 USC § 1838.

[41] The People v. Gordon Eubanks et al., 1996 Cal. LEXIS 6829; 96 Cal. Daily Op. Service 9329 (Cal. 1996).

[42] Congressional Record (Senate), page S12212.

[43] Ibid.

[44] Ibid.

[45] Ibid.

[46] "Too Much Trust: Are trade secrets safe with suppliers?" Industry Week, November 2, 1998, p. 27.

[47] United States v. Brian Russell Pringle, Criminal No. 98-M-37 (E.D. Texas, May 18, 1998); "2 Charged With Trying to Steal Intel Trade Secrets", The Fort Worth Star-Telegram (Thursday, June 4, 1998).

[48] United States v. Caryn L. Camp and Stephen R. Martin, Criminal No. 98-CR-48 (D. Maine, September 18, 1998).

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

[50] US v. Trujillo-Cohen, (CR-H 97-251, S.D. Texas, 1997), Superseding Indictment of April 29, 1998.

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

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

[53] United States v. Kai-Lo Hsu and Chester S. Ho, Criminal Action No. 97-323 (E.D. Pennsylvania, filed July 10, 1997), 982 F. Supp. 1022 (E.D. Pennsyslvania 1997).

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

[55] Supra Note 52. The import of this decision and its potential effect on the EEA and its enforcement is addressed in more detail in our 1998 paper (see Note 1).

[56] United States v. Kai-Lo Hsu and Chester Ho, 155 F.3d 189 (3rd Circuit, 1998).

[57] Ibid. at 205.

[58] U.S. v. Hsu and Ho, Criminal Action No. 97-323, Hearing Transcript of November 24, 1998.

[59] 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.

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

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

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

[63] United States v. John Fulton, Criminal No. 98-59 (W.D. Pennsylvania, April 18, 1998); Pittsburgh Post-Gazette, Monday, April 20, 1998).

[64] United States v. David T. Krumrei, Criminal No. 98-CR-300 (D. Hawaii, May 14, 1998); "You Can't Hide Your Spying Eyes: EEA Issues Emerge", Business Crimes Bulletin: Compliance and Litigation (December 1998).

[65] United States v. Huang Dao Pei, Criminal No. 98-CR-4090 (D. New Jersey, July 27, 1998); "Plot To Steal Trade Secrets Alleged", Associated Press, The Record, Northern New Jersey (Wednesday, July 29, 1998); "Sting Operation Nets Corporate Spy Suspect", by Tom Lowry, USA Today (Thursday, August 6, 1998).