ASHLEY EDWARDSAND

KATIE FRAWLEY

NATIONAL SECURITY LAW – PROFESSOR MALAWER

Economic Espionage Act of 1996

“As economic competition supplants military confrontation in global affairs, spying for high-tech secrets with commercial applications will continue to grow, and military spying

will recede into the background.”

– Peter Schweizer, The Growth of Economic Espionage

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Provisions of Statute18 U.S.C. Sections 1831-1839

Main Provision – Sec. 1831

Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly–

(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret;

(3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;

(4) attempts to commit any offense described in any of paragraphs (1)  through (3);  or (5) conspires with one or more other persons to commit any offense described in any of

paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy,

Shall… be fined not more than $500,000 or imprisoned not more than 15 years, or both. Organizations--Any organization that commits any offense described… shall be fined not more

than $10,000,000.

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Provisions of Statute

Sec. 1831 Highlights Foreign economic espionage Benefits foreign government, instrumentality,

or agent in any way Attempts and conspiracies to commit offenses

as well Penalties for individuals and organizations

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Provisions of Statute

Main Provision – Sec. 1832

Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly–

(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1) through (3);  or (5) conspires with one or more other persons to commit any offense described in paragraphs

(1) through (3), and one or more of such persons do any act to effect the object of the conspiracy,

Shall… be fined under this title or imprisoned not more than 10 years, or both. Any organization that commits any offense described in subsection (a) shall be fined not

more than $5,000,000.

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Provisions of Statute

Sec. 1832 Highlights Theft of trade secrets Economic benefit Attempts and conspiracies to commit offenses

as well Penalties for individuals and organizations

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Provisions of Statute

Additional Provisions – Definitions

Foreign Instrumentality: any agency, bureau, ministry, component, institution, association, or any legal, commercial, or business organization, corporation, firm, or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government

Foreign Agent: any officer, employee, proxy, servant, delegate, or representative of a foreign government

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Provisions of Statute

Additional Provisions – Trade Secrets Trade Secrets: 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

* Owner has taken reasonable measures to keep information secret

* The information derives independent economic value from not being generally known to the public

*Sec 1835 – A court “shall enter such orders and take such action as may be necessary and appropriate to preserve the confidentiality of trade secrets”

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History of Statute

Before the Economic Espionage Act

Federal protection only for patents No comprehensive federal remedy for theft of

trade secrets Use of statutes meant for other offenses States – Uniform Trade Secrets Act

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History of Statute

Need for the Statute

After the Cold War, government spies turned to private sector (Senate Report)

By 1996, $24 billion of corporate intellectual property being stolen each year

1995 survey of 325 companies – half had experienced theft of trade secrets

FBI estimated that 20+ countries were trying to steal trade secrets from U.S.

France, Israel, and China made economic espionage a priority for foreign intelligence services; Russia increased its efforts

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History of Statue

Adoption of EEA 1996 – October 11, 1996

“the importance of developing a systematic approach to the problem of economic espionage” (House Report)

“only by adopting a national scheme to protect U.S. proprietary economic information can we hope to maintain our industrial and economic edge and thus safeguard our national security” (Senate Report)

EEA meant to prohibit all trade secret theft “from the 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” (House Report)

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History of Statute

1999 By February 1999, only a handful of cases had been filed under the

EEA – only two involved theft by foreign companies Reports showed that the FBI was conducting up to 700 investigations

of economic espionage and trade secret theft

2009• Economic espionage laws seldom used – most companies protect themselves• U.S. companies lose over $40 billion per year from trade secret theft• Six cases under Sec 1831 settled before trial - a number of defendants have pleaded guilty and been sentenced• Only two cases have gone to trial under Sec. 1831 in 13 years • EEA cases most often brought under Sec 1832

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Cases

SEC 1832U.S. v Hsu (3rd Cir. 1998) (attempt /confidentiality)U.S. v Martin (1st Cir. 2000) – one of first cases filed

under EEAU.S. v Yang (first jury trial under EEA)

SEC 1831Boeing/China case – first under Sec 1831 brought

to trialNetLogic Microsystems case (current)

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Cases

US v Hsu

Kai-Lo Hsu, Chester S. Ho, and Jessica Chou of a Taiwanese paper company – conspiracy to steal corporate trade secrets from Bristol-Myers Squibb

“The government can satisfy its burden under Sec 1832(a)(4) by proving beyond a reasonable doubt that the defendant sought to acquire information which he or she believed to be a trade secret, regardless of whether the information actually qualified as such. Consequently, in the instant case, the defendants have no arguable constitutional or statutory right to view the unredacted portion of the Taxol documents in order to defend against charges of attempt on the basis of legal impossibility.”

“We need not decide… whether a failure to disclose trade secrets would undermine the constitutional rights of defendants charged with a completed offense under the statute.”

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Cases

US v Martin

Caryn Camp (IDEXX Laboratories) and Steven Martin (Wyoming DNAVaccine)

Martin found guilty of conspiracy to steal trade secrets in violation of Sec 1832 Agreement existed It had an unlawful purpose Voluntary participation Intent to commit the offense At least one conspirator committed an “overt act”

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Cases

US v Yang

Pin-Yen Yang, owner of Taiwanese company, Four Pillars Enterprise Company, charged with conspiracy to commit theft of trade secrets from Avery Dennison, an American competitor

April 29, 1999, jury found defendants guilty of attempt and conspiracy to commit theft of a trade secret

Appeal similar to Hsu case: “In effect, the Yangs' position would, as the Third Circuit pointed out, force "the government to disclose trade secrets to the very persons suspected of trying to steal them, thus gutting enforcement efforts under the EEA." ”

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Cases

Boeing/China Case

Dongfan Chung, former engineer for Boeing Co. and Rockwell International convicted of stealing trade secrets critical to US space program – relaying information to China

Decided July 16, 2009 – 6 counts of economic espionage

First Sec 1831 trial (non-jury)

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Cases

NetLogic MicrosystemsOctober 2009

Lan Lee and Yuefei Ge charged with stealing technology from NetLogic to establish a rival company backed by China

First Sec 1831 case to go to jury trial

Challenge will be to show that there was clear intent to benefit the foreign government

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Problems/Issues

Confidentiality vs. Rights of the AccusedGuidelines for trade secret theft vs.

competitive intelligenceGuidelines for companies to protect trade

secrets - reasonable measures to keep information secret

Lack of cases filed under Sec 1831 – difficulty in collecting evidence for such cases

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Something to consider…

The lack of Clarity of companies protective measures and guidelines Economic and Industrial Espionage presents a series

of challenges to many American companies. Information breaches are taking place and are costing

companies substantial sums of money Billions of dollars and thousands of jobs are lost due

to theft of trade secrets.

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U.S. entities, individuals or organizations victimized by economic espionage must produce documentation showing reasonable steps were taken to protect trade secrets from theft and compromise.

If effective security controls cannot be established, the success of prosecution under the EEA can be severely jeopardized

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Documented efforts to effectively protect trade secrets: “Compliance

Plan”

• Clear written policies and procedures regarding trade secrets and information security.

• A formally established security unit tasked in writing to protect trade secrets.

• Nondisclosure statements for employees and contractors.

• Physical, technical, and electronic security protection of trade secrets.

• Access to trade secrets on a need-to-know basis.

• Periodic and random technical countermeasure surveys to reduce the risk of electronic eavesdropping.

• A formal background investigation of all employees and contractors having access to trade secrets.

• A formal mechanism for investigating breeches in the security of trade secret protection.

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Facts

Trade secrets are a form of intellectual property.

To be effective, the EEA must complement existing intellectual property jurisprudence. the EEA prohibits practices that are otherwise lawful

as part of a reverse engineering program.

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• Reverse engineering (RE) is the process of taking taking something (a device, an electrical component, a software program, etc.) apart and analyzing its workings in detail, usually with the intention to construct a new device or program that does the same thing without actually copying anything from the original.

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Issue

The EEA raises certain federalism concerns. The EEA’s apparent prohibition of reverse engineering is contrary to the trade secret law of all fifty states and the District of Columbia

Issue: Creating a federal crime of an activity that is clearly allowed by all of the states raises questions regarding the proper balance between the federal and state governments.

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Policy Proposal

Amendment to Allow Reverse EngineeringProposal: Amend the EEA to explicitly allow

reverse engineering and to limit its application to espionage activities the EEA should be amended to conform to the

standard intellectual property law regarding reverse engineering.

The language necessary to allow reverse engineering, and to bring the EEA into compliance with the reverse engineering policy of other intellectual property law, already has been developed by Congress as part of the Semiconductor Chip Protection Act

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Pros & Cons

Reverse engineering: would align intellectual property and state trade secret laws

Limited concerns by other intellectual property law

Does not conflict with trade secret laws

Reverse engineering can be seen as unethical

The term is broadly used and misleading

Many software license agreements strictly forbid reverse engineering.

“An excuse for illegal activity”

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Positions of Various Parties

Congress: Will eventually adopt the policy for clarity of the intellectual property in reference to the EEA

Remain at the state levelBusiness/Stakeholders: Evaluate and

implement strategic “Compliance plans”Those who have benefited will continue to

advanceAccepted by the Scientific community

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Implications of Suggestions

To be effective, the EEA must complement existing intellectual property jurisprudence.

Should also consider that many trade secret misappropriation cases arising under civil law involved the copying of legally obtained items, breaches of contracts, or failure to honor confidential relationships.

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Conclusion

“The EEA suffers from problems in terms of Constitutional notice, conflicts with intellectual property law, and basic principles of federalism. Understanding the act and how it is likely to be applied are critically important, both for victims and potential defendants. Narrowing the statute’s scope and expressly permitting reverse engineering deters the activities the EEA was drafted to prevent, while avoiding these three problem areas.”

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Works Cited

Lee, E. (2009, October). Global Issues: “Fighting Economic Espionage.” Retrieved November 2009 From http://www.managesmarter.com/msg/content_display/sales/e3iebae8a5c132016bc44b17397ae6e405chttp://www.managesmarter.com/msg/content_display/sales/e3iebae8a5c132016bc44b17397ae6e405c

Kelly, P. (1997). “Economic Espionage Act of 1996.” Retrieved November 2009 From

Publications - Law Enforcement Bulletin - July 1997 issue - The Economic Espionage Act of 1996

Uhrich, C. (2001, April). “ The Economic Espionage Act: Reverse Engineering and the Intellectual Property of Public Policy.” Retrieved November 2009 From http://www.mttlr.org/volseven/Uhrich.pdf

Poppick, D. (2009, April). “Federal Law Criminalizes Misappropriation of Trade Secret”. Retrieved November 2009 From

A TOOL FOR FIGHTING ECONOMIC ESPIONAGE: Federal Law Criminalizes Misappropriation of Trade Secrets : EBG Trade Secrets and Noncompete Blog

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Works Cited

Pasternak, D. and G. Witkin. (1996, February). The Lure of the Steal. Retrieved November 2009 from http://www.usnews.com/usnews/news/articles/960304/archive_034063_print.htm

Schwab, A. (1999, June). Federal Protection of Trade Secrets: Understanding the Economic Espionage Act of 1996. Retrieved November 2009 from http://library.findlaw.com/1999/Jun/1/128088.html

United States v. Hsu. (3d Cir. 1998). Retrieved November 2009 from http://gozips.uakron.edu/~dratler/2006tradesec/materials/usvhsu.htm

US v. Martin. (1sr Cir. 2000). Retrieved November 2009 from http://openjurist.org/228/f3d/1 Dilworth, G. (2005, April). The Economic Espionage Act of 1996: an Overview. Retrieved November 2009 from

http://www.cybercrim.gov/usamay2001_6.htm The Economic Espionage Act. (2002, March). Retrieved November 2009 from

http://www.justice.gov/criminal/cybercrim/eea.html Robertson, J. (2009, October). Rare Economic Espionage Case Going to Trial. Retrieved November 2009 from

http://www.google.com/hostednews/ap/article/ALeqM5gYvesw6vHc2ZxOasqRGn_q5H Mintz, H. (2009, October). Silicon Valley Espionage Case Only Second of Kind in Nation to Go to Trial. Retrieved

November 2009 from http://www.mercurynews.com/breaking-news/ci_13590675?nclick_check=1 Hornick. J. (1999, February). The Impact of the Economic Espionage Act of 1996. Retrieved November 2009

from http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=e406fcb-8d4c-4d8 Schweizer, P. (1996, January/February). The Growth of Economic Espionage. Retrieved November 2009 from

www.foreignaffairs.com Chinese-born Engineer Guilty of Spying. (2009, July). Retrieved November 2009 from

http://www.msnbc.msn.com/id/31946227/ns/us_news-security United States v. Martin. (1st Cir. 2000). Retrieved November 2009 from

http://gozips.uakron.edu/~dratler/2006tradesec/materials/usvmartin.htm United States v. Yang. (6th Cir. 2002). Retrieved November 2009 from

http://www.cybercrime.gov/4Pillars_6thCir.htm Uniform Trade Secrets Act. Retrieved November 2009 from http://nsi.org/Library/Espionage/usta.htm Section 1831: Economic Espionage. Retrieved November 2009 from

http://www.justice.gov/criminal/cybercrime/18usc1831.htm Section 1832: Theft of Trade Secrets. Retrieved November 2009 from

http://www.justice.gov/criminal/cybercrime/18usc1832.htm Section 1839: Definitions. Retrieved November 2009 from http://www.law.cornell.edu/uscode/18/1839.html

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