VIII.A. Introduction

Until 1996 there was no federal statute that explicitly criminalized the theft of commercial trade secrets. Cf. 18 U.S.C. § 1905 (providing, inter alia, misdemeanor sanctions for the unauthorized disclosure of government information, including trade secrets, by a government employee). Federal courts, however, under limited circumstances, did uphold convictions for the interstate transportation of stolen trade secrets or proprietary economic information under 18 U.S.C. § 2314, or for the disclosure of information in violation of a confidential or fiduciary relationship under 18 U.S.C. § 1341 or 1343.

Because federal prosecutors sometimes had trouble "shoe-horning" the theft of trade secrets into the above statutes and because of the increased recognition of the increasingly important role that intellectual property plays in the well-being of the American economy, Congress enacted the Economic Espionage Act of 1996, effective October 11, 1996. See Pub. L. No. 104- 294, 110 Stat. 3489. In general, it criminalizes the theft of trade secrets.

In considering cases under this new statute, prosecutors may find other resources to be helpful as well, including treatises or law review articles. See, e.g., Roger Milgrim, Milgrim on Trade Secrets (1994); Michael Coblenz, Intellectual Property Crimes, 9 Alb. L.J. Sci. & Tech. 235 (1999); Randy Gidseg et al., Intellectual Property Crimes, 36 Am. Crm. L. Rev. 835 (1999); James H.A. Pooley, Mark A. Lemley, & Peter J. Toren, Understanding the Economic Espionage Act of 1996, 5 Tex. Int. Prop. L.J. 177 (Winter 1997). Forms providing a sample indictment and jury instructions for theft of trade secrets, 18 U.S.C. § 1832, are provided in Appendix E at page 265.

VIII.B. The Economic Espionage Act of 1996, 18 U.S.C. §§ 1831- 1839

The Economic Espionage Act of 1996 ("EEA") contains two separate provisions that criminalize the theft or misappropriation of trade secrets. The first provision, codified at 18 U.S.C. § 1831(a), is directed towards foreign economic espionage and requires that the theft of the trade secret be done to benefit a foreign government, instrumentality, or agent. It states:

(a) In general. -- 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 person do any act to effect the object of the conspiracy,

shall, except as provided in subsection (b), be fined not more than $500,000 or imprisoned not more than 15 years, or both.

In contrast, the second provision, 18 U.S.C. § 1832, makes criminal the commercial theft of trade secrets, carried out for purely economic or commercial advantage:

(a) 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, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.

Reflecting the more serious nature of foreign government-sponsored economic espionage, an individual convicted of violating 18 U.S.C. § 1831 can be imprisoned for up to 15 years and fined $500,000 or both, whereas a defendant convicted for theft of trade secrets under 18 U.S.C. § 1832 can be imprisoned for up to 10 years and fined $250,000 or both. See 18 U.S.C. §§ 1831(a)(4), 1832(a)(5). Organizations found guilty under the EEA can be fined can be fined up to $10 million for violating § 1831 or $5 million for violating 18 U.S.C. § 1832.

There are a number of important features to the EEA, including a provision for the criminal forfeiture of any property or proceeds derived from a violation of the statute. See 18 U.S.C. § 1834. The EEA also permits the Attorney General to institute civil enforcement actions and obtain appropriate injunctive relief for violations. See 18 U.S.C. § 1836. Furthermore, because of the recognized difficulty of maintaining the secrecy of a trade secret during litigation, the EEA requires that courts take such actions as necessary to preserve the confidentiality of the trade secret. See 18 U.S.C. § 1835. As discussed in a separate section below, the implementation of this particular provision of the EEA has already caused considerable controversy in the pretrial stages of EEA cases.

The EEA also covers attempts and conspiracies to violate the EEA; conduct occurring outside the United States, where the offender is a citizen or permanent resident alien of the United States; and acts in furtherance of the offense that were committed in the United States. See 18 U.S.C. § 1837. Finally, until October 11, 2001, all prosecutions brought under the EEA must first be approved by the Attorney General, the Deputy Attorney General, or the Assistant Attorney General of the Criminal Division. Pursuant to this requirement, the Computer Crime and Intellectual Property Section of the Criminal Division of the Department of Justice has been designated to coordinate requests for approval for 18 U.S.C. § 1832 cases. The Internal Security Section coordinates requests for approval for 18 U.S.C. § 1831 cases.

The EEA contains two separate sections that criminalize the theft of trade secrets. Under either section, to obtain conviction for a completed offense, the government must prove beyond a reasonable doubt that: (1) the defendant stole, or without authorization of the owner, obtained, destroyed or conveyed information; (2) the defendant knew or believed that this information was a trade secret; and (3) the information was in fact a trade secret. In addition to these elements, to establish a violation under 18 U.S.C. § 1831, the government must also prove that the defendant knew the offense would benefit or was intended to benefit a foreign government, foreign instrumentality, or foreign agent.

If the government cannot establish that the defendant acted with the intent to benefit a foreign entity, the government can establish a violation of 18 U.S.C. § 1832 if it can establish, in addition to the first three elements described above, that: (4) the defendant intended to convert the trade secret to the economic benefit of anyone other than the owner; (5) the defendant knew or intended that the owner of the trade secret would be injured; and (6) the trade secret was related to or was included in a product that was produced or placed in interstate or foreign commerce.

As noted, both sections also explicitly criminalize attempts and conspiracies to take trade secrets. See 18 U.S.C. §§ 1831(a)(4)- (5), 1832(a)(4)-(5). Additionally, both sections criminalize the knowing receipt, purchase, destruction or possession of a stolen trade secret. See 18 U.S.C. §§ 1831(a)(3), 1832(a)(3). An analysis of each of the elements of completed offenses are discussed in detail below. The applicable legal analysis for attempts and conspiracies is set forth in the next section.

The initial element of a criminal prosecution under either § 1831 or § 1832 is that the defendant obtained, destroyed or conveyed information without the authorization of the owner. The type of acts which are prohibited are broadly defined and include traditional instances of theft, i.e., where the object of the crime is physically removed from the owner's possession. See 18 U.S.C. §§ 1831(a)(1), 1832(a)(2). However, less traditional methods of misappropriation and destruction are also included within the terms of the EEA. Under 18 U.S.C. §§ 1831(a)(2), 1832(a)(2), the prohibited acts include copying, duplicating, sketching, drawing, photographing, downloading, uploading, altering, destroying, photocopying, replicating, transmitting, delivering, sending, mailing, communicating, or conveying. With many of these methods the original property may not necessarily leave the custody or control of the owner, but the unauthorized duplication or misappropriation may reduce or destroy the value of the owner's property. It was the intent of Congress "to ensure that the misappropriation of intangible information is prohibited in the same way that the theft of physical items are protected." S. Rep. No. 359, 104th Cong., 2d Sess. 16 (1996).

The crux of the misappropriation element of the statute is that the government must prove that the defendant acted "without authorization" from the owner. According to the legislative history, "authorization is the permission, approval, consent or sanction of the owner" to obtain, destroy or convey the trade secret. 142 Cong. Rec. S12202, S12212 (daily ed. Oct. 2, 1996). Thus, for example, where an employee has authorization from his employer to possess a trade secret during the regular course of employment, he can still violate the EEA if he "conveys" it to a competitor without his employer's permission.

The first mens rea element that the government must prove in an EEA case is that the defendant's misappropriation was done "knowingly." Generally, under criminal statutes covering the theft of tangible property, the government must prove that the defendant knew that the object he stole was property that he had no lawful right to convert for his personal use. Thus, in an EEA context, the government must show generally that the defendant knew or had a firm belief that the information he or she was taking was a trade secret. Obviously, however, whether information constitutes a "trade secret" is a legal determination requiring a consideration of the factors set forth in 18 U.S.C. § 1839(3). Prosecutions under this statute would be nearly impossible if the government were required to show in every case that the defendant had performed a detailed analysis of whether the stolen information constituted a trade secret under the multi-part definition set forth in 18 U.S.C. § 1839. Requiring this level of knowledge on the part of a defendant would be squarely at odds with Congress's observation that the knowledge requirement should not be a significant obstacle to appropriate prosecutions:

This requirement should not prove to be a great barrier to legitimate and warranted prosecutions. Most companies go to considerable pains to protect their trade secrets. Documents are marked proprietary; security measures put in place; and employees often sign confidentiality agreements to ensure that the theft of intangible information is prohibited in the same way that the theft of physical items are protected.

142 Cong. Rec. S12202, S12213 (daily ed. Oct. 2, 1996). Based on this legislative explanation, proving that a defendant was aware of proprietary markings, security measures and confidentiality agreements should be sufficient to establish the knowledge element of the statute. More generally, the knowledge element of this statute is satisfied if the government can prove that the defendant knew or had a firm belief that the information to be taken had the attributes of a trade secret as described in 18 U.S.C. § 1839 -- that is, the defendant believed that the information was valuable to its owner because it was not generally known to the public and that its owner had taken measures to protect it. See 142 Cong. Rec. at S12213 (daily ed. Oct. 2, 1996) ("For a person to be prosecuted, the person must know or have a firm belief that the information he or she is taking is proprietary."). It is not necessary that the defendant himself have drawn the conclusion that the information was a trade secret. On the other hand, a person who takes a trade secret because of ignorance, mistake or accident, or who actually believes that the information is not proprietary after taking reasonable steps to warrant such belief, cannot be prosecuted under the EEA

The definition of the term "trade secret" under the EEA is very broad. As defined at 18 U.S.C. § 1839, it includes, generally, all types of information, however stored or maintained, which the owner has taken reasonable measures to keep secret and which has independent economic value:

(3) the term "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. This definition is broader than other definitions of "trade secret," including notably the definition of "trade secret" in the Uniform Trade Secrets Act, but prior case law should be instructive in illuminating the EEA's definition of a trade secret. As the First Circuit recently noted, "Section 1832(a) was not designed to punish competition, even when such competition relies on the know-how of former employees of a direct competitor. It was, however, designed to prevent those employees (and their future employers) from taking advantage of confidential information gained, discovered, copied, or taken while employed elsewhere." United States v. Martin, No. 00-1039, 2000 WL 1376377, at *6 (1st Cir. Sept. 28, 2000) (affirming conviction for conspiracy to steal trade secrets).

Unlike patents, which must be both novel and a step beyond "prior art," trade secrets must be only "minimally novel." See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476 (1974) (reinstating permanent injunction under Ohio trade secret law against rival chemical company); Buffets, Inc. v. Klinke, 73 F.3d 965, 968 (9th Cir. 1996) (affirming inapplicability of trade secret statute in case involving restaurant chain's recipes and manuals); Arco Indus. Corp. v. Chemcast Corp., 633 F.2d 435, 442 (6th Cir. 1980) (holding that certain method of manufacturing grommets was not protectable under Michigan trade secret law).

In other words, a trade secret must contain some element that is not known and sets it apart from what is generally known. According to the legislative history of the EEA, "[w]hile we do not strictly impose a novelty or inventiveness requirement in order for material to be considered a trade secret, looking at the novelty or uniqueness of a piece of information or knowledge should inform courts in determining whether something is a matter of general knowledge, skill or experience." 142 Cong. Rec. S12201, S12212 (daily ed. Oct. 2, 1996).

Secrecy.

The key attribute of information constituting a trade secret under 18 U.S.C. § 1839 is that it is not generally known to, or reasonably ascertainable by proper means by, the public. Whether the information was secret before it was obtained by the defendant is a question of fact. The government often has the difficult burden of proving a negative, i.e., that the information was not generally available to the public. In this regard, prosecutors should make sure that the information has not been publicly disclosed through, for example, technical journals or other publications. In addition, the prosecutor should determine whether the information was obvious to the victim's competitors in the industry. Sometimes information that a company regards as its proprietary "crown jewels" is well-known in the industry and, therefore, not protected. On the other hand, if a trained scientist is able to glean information from publications that would lead him to deduce a particular formula only after many hours of laboratory testing and analysis, the publication of such articles would not necessarily vitiate trade secret protection, since the scientist's work would not qualify as "reasonably ascertainable by the public."

Furthermore, every part of the information need not be completely confidential to qualify for protection as a trade secret. A trade secret can include a combination of elements that are in the public domain, if the trade secret constituted a unique, "effective, successful and valuable integration of the public domain elements." Buffets, Inc. v. Klinke, 73 F.3d 965, 968 (9th Cir. 1996) (affirming inapplicability of trade secret statute in case involving restaurant chain's recipes and manuals); Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 1202 (5th Cir. 1986) (concerning trade secrets involving zinc recovery furnaces and tungsten reclamation process); Rivendell Forest Prods. Ltd. v. Georgia-Pacific Corp., 28 F.3d 1042, 1046 (10th Cir. 1994) (concerning lumber industry trade secrets); see also Lawfinders Assoc., Inc. v. Legal Research Ctr., Inc., 65 F. Supp.2d 414, 423 (N.D. Texas 1999) (concerning legal research trade secrets); Apollo Techs. v. Centrosphere Indus., 805 F. Supp. 1157, 1197 (D.N.J. 1992) (concerning trade secrets involving pollution control chemicals and related materials).

Reasonable Measures.

Trade secrets are also fundamentally different from other forms of property in that the owner of a trade secret must take reasonable measures under the circumstances to keep the information confidential. See 18 U.S.C. § 1839(3)(A). This requirement is generally not imposed upon owners of other types of property. For example, a defendant can be convicted for stealing a bike even if the victim failed to protect it by leaving it unlocked on his front porch. Nevertheless, this requirement was imposed to insure that a person cannot obtain a monopoly on ideas that are in the public domain.

The extent of the security measures taken by the owner of the trade secret need not be absolute, but must be reasonable under the circumstances, depending on the facts of the specific case. See, e.g., Pioneer Hi-Bred Int'l v. Holden Found. Seeds, 35 F.3d 1226, 1236 (8th Cir. 1994) (describing steps taken by plaintiff to safeguard genetic messages of its genetically engineered corn); Gates Rubber Co. v. Bando Chemical Indus., Ltd., 9 F.3d 823, 848-49 (10th Cir. 1993) (describing steps taken by plaintiff to protect industrial belt replacement program software); K-2 Ski Co. v. Head Ski Co., 506 F.2d 471, 473 (9th Cir. 1974) (describing steps taken by plaintiff to protect trade secrets relating to the design and manufacture of high performance skis). "Reasonable efforts" can include advising employees of the existence of a trade secret, limiting access to the information to a "need to know basis," requiring employees to sign confidentiality agreements, MAI Sys. Corp. v. Peak Computer, 991 F.2d 511, 521 (9th Cir. 1993) (describing measures taken by computer system manufacturer to safeguard its trade secrets from computer servicing company), and keeping secret documents under lock and key. 1 Roger Milgrim, Milgrim on Trade Secrets § 1.04 at 1-126 (1994). See also Reingold v. Swiftships, Inc., 126 F.3d 645, 650 (5th Cir. 1997) (holding that evidence probative of secrecy includes precautions taken by the claimant to preserve secrecy, the willingness of licensees to pay for disclosure of the secret, unsuccessful attempts by the defendant or others to duplicate the information by proper means, and resort by a defendant to improper means of acquisition).

Each trade secret owner must assess the value of the protected material and the risk of its theft when devising reasonable security measures. Under this principle, prosecutors must be able to establish that the security measures used by the victim to protect the trade secret were reasonably commensurate with the value of the trade secret. For example, prosecutors should determine the extent of the security used to protect the trade secret, including physical security and computer security, as well as the company's policies on sharing information with third-parties, including sub-contractors and licensed vendors. If investigation reveals, for example, that any low-level employee in a very large company could gain access to the information, it might not qualify as a trade secret.

Courts have held that information may remain a trade secret even if the owner discloses the information to its licensees, vendors, or third parties for limited purposes. See, e.g., Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174 (7th Cir. 1991) (holding that fact issue whether manufacturer took reasonable precautions to protect its trade secrets in its piece part drawings used to manufacture replacement parts precluded summary judgement). The owner of the trade secret must, however, take reasonable security measures when it discloses the information, such as requiring non-disclosure agreements from all recipients of the information. Further, a trade secret can lose its protected status if it is disclosed, for example, either through legal filings (such as by the issuance of a patent), or through accidental or intentional disclosure by an employee at conferences, at trade shows, or in writings. See, e.g., Apollo Techs. v. Centrosphere Indus., 805 F. Supp. 1157, 1198 (D.N.J. 1992) (concerning trade secrets involving pollution control chemicals and related materials).

NOTE: A process or device that is patented cannot be a trade secret after the patent has been issued. Upon publication of the patent, the process is publically available for all to see, but the owner enjoys patent protection against another company's use of the technology. In many circumstances, however, subsequent refinements and enhancements of the technology described in the patent may qualify as trade secrets so long as they are not reasonably ascertainable from the published patent itself. See United States v. Hsu, 185 F.R.D. 192 (E.D. Penn. 1999) ("[A] patent application's disclosure of 'best mode' does not require disclosure of later or more specific refinements of the art."). Finally, during the period when a patent has been submitted, the information contained in the patent application may qualify as a trade secret so long as the application itself has not been published by the patent office.

Courts have differed as to whether information can lose its status as a trade secret through an anonymous posting on the Internet, even for a very limited time. Compare Religious Tech. Ctr. v. Netcom On-Line Communication Servs. Inc., 923 F. Supp. 1231 (N.D. Cal. 1995) (holding that trade secret status was lost when information was anonymously posted to the Internet), with DVD Copy Control Ass'n, Inc. v. McLaughlin, 2000 WL 48512 at *3 (Cal.Superior, Jan 16, 2000) (refusing to deem trade secret status destroyed merely by the posting of the trade secret to the Internet because "to hold otherwise would do nothing less than encourage misappropriators of trade secrets to post the fruits of their wrongdoing on the Internet as quickly as possible and as widely as possible thereby destroying a trade secret forever").

Disclosures made to the government or to other law enforcement agencies as part of an investigation or prosecution of an EEA case, however, should have no effect on the trade secret status of the materials. This type of disclosure is essential for the investigation and prosecution of illegal activity and is expressly contemplated by the Economic Espionage Act, as several sections of the EEA make clear. First, 18 U.S.C. § 1835 specifically authorizes the court to "enter such orders and take such other action as may be necessary and appropriate to preserve the confidentiality of trade secrets consistent with the requirements of the Federal Rules of Criminal and Civil Procedure. . . and other applicable laws." 18 U.S.C. § 1835. In fact, under this provision, the government has the right to seek an interlocutory appeal of any court order directing the "disclosure of any trade secret." Id. This section is aimed at protecting the victim's trade secret information during the course of a criminal prosecution. Such protection would be unnecessary unless it was contemplated that victims would first provide the government with the trade secrets for use in the criminal investigation and prosecution. In addition to the protection afforded to trade secret owners by the EEA itself, there are additional restrictions on the disclosure of trade secret information acquired by the Department of Justice for law enforcement purposes without the consent of the trade secret owner or the express written authorization of Senior Officials at the Department of Justice. See, e.g., 28 C.F.R. § 16.21. As a result, trade secret owners who disclose information to law enforcement representatives should not be deemed to have waived trade secret protection. See United States v. Pin Yen Yang, 1999 U.S. Dist. LEXIS 7130 (N.D. Ohio, March 18, 1999) (holding that victim's disclosure of trade secret information to government for use in a sting operation under oral assurances that the information would not be used or disclosed for any purpose unrelated to the case did not vitiate trade secret status).

Such reporting to law enforcement is also specifically encouraged by 18 U.S.C. § 1833, which confirms that "[the EEA] does not prohibit . . . the reporting of a suspected violation of law to any governmental entity of the United States . . . if such entity has lawful authority with respect to that violation." The inclusion of this section, together with 18 U.S.C. § 1835, demonstrates that Congress intended to ensure that someone who becomes aware of an EEA violation has no disincentive to report criminal activity to law enforcement. If disclosures to law enforcement, whether by the owner of a trade secret or a third-party, eliminated trade secret protection, Congressional intent would be frustrated. See United States v. Hsu, 185 F.R.D. 192, 199 (E.D. Pa. 1999) (momentary disclosure of trade secret information by government to defendant as part of sting does not waive trade secret protection because "to hold that dangling such bait waives trade secret protection would effectively undermine the Economic Espionage Act at least to the extent that the Government tries, as here, to prevent an irrevocable loss of American technology before it happens"). Therefore, it is unnecessary for federal prosecutors or law enforcement agents to sign protective orders with victims before accepting trade secret information.

Independent economic value.

Finally, the trade secret must derive "independent economic value . . . from not being generally known to . . . the public." 18 U.S.C. § 1839(3)(B). Since the EEA does not require that the government prove a specific jurisdictional amount, proving this element should not be difficult. As discussed below in the section on valuation, the value of the trade secret need not be established with precision and can be determined through a variety of different methods, including: (1) the amount similar trade secret information sold for on the legitimate open market, if available; (2) a reasonable royalty calculation based on what a willing buyer would pay a willing seller for the technology in an arms-length transaction; (3) the amount of research and development costs expended by the trade secret owner; and, (4) as a last resort, the thieves' market price that the defendant actually received or paid in exchange for the technology.

Customer lists.

Not all information that a company deems to be proprietary will satisfy this element. For example, under the similar definition of trade secrets found in the Uniform Trade Secrets Act, courts generally have found that customer lists should be considered trade secrets only where the customers are not known in the particular industry, the customers can be discovered only by extraordinary efforts, and where the customer list has been developed through a substantial expenditure of time and money, providing its owner with independent economic value because the information is not known to the general public. See Electro Optical Indus., Inc. v. White, 76 Cal. App.4th 653, 685 (1999) ("[W]here many firms are potential customers for a product but only a few actually purchase it, their identities have economic value to all suppliers of the product because compiling a list of actual customers requires an investment of time and money"); Leo Silfen, Inc. v. Cream, 278 N.E.2d 636, 639-41 (N.Y. 1972) (listing factors). Conversely, where the identities of the customers are readily ascertainable outside the list owner's business, and the compilation of the list was merely the result of general marketing efforts, courts have been less inclined to afford the lists trade secret status. See Standard Register Co. v. Cleaver, 30 F. Supp.2d 1084, 1095 (N.D.Ind. 1998) (holding that list was not a trade secret where owner's competitors knew customer base, knew other competitors quoting the work, and were generally familiar with the customers' needs); Nalco Chem. Co. v. Hydro Techs., Inc., 984 F.2d 801, 804 (7th Cir. 1993) (holding that customer lists were not a trade secret where base of potential customers was neither fixed nor small).

If a prosecutor is contemplating charging a customer list case under the Economic Espionage Act, he or she is advised to contact the Computer Crime and Intellectual Property Section for further consultation and guidance.

VIII.B.3. Additional 18 U.S.C. § 1831 element: intent to benefit a foreign government, foreign instrumentality, or foreign agent

The second mens rea requirement of a 18 U.S.C. § 1831 violation is that the defendant intended or knew that the offense would "benefit" a "foreign government, foreign instrumentality, or foreign agent." The term "foreign instrumentality" means: "any agency, bureau, component, institution, association, or any legal, commercial, or business organization, firm, or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government." 18 U.S.C. § 1839(1). The term "foreign agent" means: "any officer, employee, proxy, servant, delegate, or representative of a foreign government." 18 U.S.C. § 1839(2). Thus, the government must show that the defendant knew or had a firm belief that misappropriation would benefit a foreign entity. When this "entity" is not, per se, a government entity (e.g., a business), there must be evidence of foreign government sponsorship or "coordinated intelligence activity." 142 Cong. Rec. S12201, S12212 (daily ed. Oct. 2, 1996).

The legislative history of the EEA indicates that "benefit" is to be interpreted broadly and is not limited to an economic benefit, but includes a "reputational, strategic, or tactical benefit." H.R. Rep. No. 788, 104th Cong., 2d Sess. (1996).

The requirement that the benefit accrue to a foreign government, instrumentality or agent should be very carefully analyzed by government prosecutors. In order to establish that the defendant intended to benefit a "foreign instrumentality" the government must show that the entity was "substantially owned, controlled, sponsored, commanded, managed or dominated by a foreign government." 18 U.S.C. § 1839(1). The EEA does not define "substantially," but its use suggests that the prosecution does not have to prove complete ownership, control, sponsorship, command, management or domination. The legislative history states:

substantial in this context, means material or significant, not technical or tenuous. We do not mean for the test of substantial control to be mechanistic or mathematical. The simple fact that the majority of the stock of a company is owned by a foreign government will not suffice under this definition, nor for that matter will the fact that a foreign government only owns 10 percent of a company exempt it from scrutiny. Rather the pertinent inquiry is whether the activities of the company are, from a practical and substantive standpoint, foreign government directed.

142 Cong. Rec. S12201, S12212 (daily ed. Oct. 2, 1996).

Thus, § 1831 does not apply where a foreign corporation misappropriates the trade secret and there is no evidence of sponsorship or "coordinated intelligence activity" by a foreign government. Id. at S12213. In such an instance, however, the foreign corporation could still be properly charged under 18 U.S.C. § 1832. Through October 1, 2000, there have not been any cases brought under 18 U.S.C. § 1831. For questions relating to charges under § 1831, contact the Internal Security Section at the Criminal Division at (202) 514-1187.

Under 18 U.S.C. § 1832, the government must prove that the act of misappropriating the trade secret was intended for the economic benefit of a person other than the rightful owner (which can be the defendant, a competitor of the victim, or some other person or entity). This differs from 18 U.S.C. § 1831 where foreign government activity is required, and the benefits may be non-economic. Therefore, a person who misappropriates a trade secret but who does not intend for anyone to gain economically from the theft cannot be prosecuted under 18 U.S.C. § 1832.

Beyond demonstrating that the defendant both knew the information taken was proprietary and intended that the misappropriation economically benefit someone other than the rightful owner, the government in an 18 U.S.C. § 1832 case must also prove a third mens rea element: that the defendant intended to "injure" the owner of the trade secret. According to the legislative history of the EEA, this provision "does not require the government to prove malice or evil intent, but merely that the actor knew or was aware to a practical certainty that his conduct would cause some disadvantage to the rightful owner." H.R. Rep. No. 788, 104th Cong., 2d Sess. 1996.

By definition, in order for a trade secret to have value, it must confer a commercial advantage to the owner. Once the information is disclosed to another for the recipient's benefit, the trade secret loses its value. Accordingly, in many cases, establishing this element may not require additional evidence beyond that required to establish that the defendant acted for the economic benefit of someone other than the owner. For example, when a trusted employee of a computer chip manufacturer steals a prototype chip and conveys it to a known direct competitor of the owner, the disclosure of the information to the competitor may be sufficient circumstantial evidence to establish the requisite intent. See, e.g., United States v. Martin, No. 00-1039, 2000 WL 1376377, at *7 (1st Cir. Sept. 28, 2000) (holding that evidence sufficiently established intent to injure when recipient of information had contemplated opening a competing lab and had asked insider to plan to compete with victim's testing methods). In other circumstances, however, intent to injure may become more significant. For example, if a bank employee steals a customer list (assuming that the list would otherwise qualify as a trade secret) from a bank in order to solicit the bank's mortgage customers to attend a personal empowerment seminar sponsored by the bank employee, it is not self-evident that the employee intended to injure the bank, even though he was acting for his own economic benefit.

This element requires the government to prove that the trade secret was "related to or included in a product that is produced for or placed in interstate or foreign commerce." 18 U.S.C. § 1832. This element encompasses two issues: that the trade secret be related to a product, and that the product was produced for or placed in interstate or foreign commerce. The requirement that there be a nexus to interstate or foreign commerce appears merely designed to justify federal jurisdiction and can be satisfied in most cases. For example, where the trade secret is related to a product actually being manufactured and sold, this element would be easily established by evidence of interstate sales. Where a product is still in the development phase but is being developed to be sold in interstate commerce, the victim's intent to distribute the product in the future can be adequately demonstrated either by direct witness testimony or by documentary evidence describing the intended goals of the project.

It is possible that a defendant might argue that products still in the research and development stage are not yet being "produced for interstate commerce" because such items are not yet being "produced" for sale. This argument should not be persuasive. If this argument were to prevail, much of the protection of the EEA would be lost, since a trade secret is often most valuable during the development phase. Once the product embodying the trade secret is released to the public, the value of the trade secret is often lost because the product can be examined and the trade secret obtained or deduced.

The implied distinction between products and services contained in this element can be a difficult one to maintain. Although there is no discussion of the "product" requirement in the legislative history, the use of the term "product" appears to exclude pure services, such as technical skills and know-how not embodied in a saleable, transportable good. Distinguishing between a "pure service" and a "product," however, is not an easy task. An example of a "pure service" might be the services of an individual chiropractor who has developed a secret technique for manipulating a patient's spine to reduce or eliminate back pain. If there is no evidence that the chiropractor is developing or has developed a medical product utilizing this secret, but merely uses it in private practice, the theft of this technique by someone who has worked with the doctor, or even by someone who has broken into the doctor's office and pilfered files does not appear to violate the terms of the statute. On the other hand, many "services" are packaged and sold across state lines much like products. For example, the product of a cellular telephone company may be a package consisting of 600 minutes of air-time per month, caller ID, voice mail, paging and messaging units, all of which is accompanied by a "free" telephone. If a cellular telephone company develops a trade secret relating to the technical operation of its cellular network, the fact that the essence of what the company provides is telephone service should not necessarily preclude a prosecution under the EEA.

The most reasonable explanation of the origin of the product requirement is derived from passages of legislative history indicating that the statute is not designed to apply "to innocent innovators or to individuals who seek to capitalize on their lawfully developed knowledge skill or abilities." As the House-Senate Conference report states:

A prosecution under this statute must establish a particular piece of information that a person has stolen or misappropriated. It is not enough to say that a person has accumulated experience and knowledge during the course of his or her employ. Nor can a person be prosecuted on the basis of an assertion that he or she was merely exposed to a trade secret while employed. A prosecution that attempts to tie skill and experience to a particular trade secret should not succeed unless it can show that the particular material was stolen or misappropriated. Thus, the government cannot prosecute an individual for taking advantage of the general knowledge and skills or experience that he or she obtains or comes by during his tenure with a company.

142 Cong. Rec. S12201-03, S12213 (daily ed. Oct. 2, 1996). While the product requirement is not explicitly mentioned in the text, the passage provides support for the notion that skill, as opposed to a particular proprietary piece of information, should not form the basis of a prosecution. Accordingly, while the product requirement should not be interpreted to require a tangible item, theft of information relating to services that are based entirely on personal skills are likely to be excluded under this statute.

As noted, the statute also prohibits attempts and conspiracies to misappropriate trade secrets. The nature of the elements required to prove these inchoate offenses was the subject of the only appellate decision thus far under the EEA. In United States v. Hsu, 155 F.3d 189 (3d Cir. 1998), the defendants were charged with attempting and conspiring to steal the techniques for manufacturing Taxol, an anti-cancer drug, from Bristol Meyers-Squibb. The Third Circuit heard an interlocutory appeal from a district court order compelling the government to disclose to the defendants the very trade secrets that were the subject of the EEA charges, based on the district court's opinion that the defendants were entitled to have the opportunity to demonstrate that the materials were not trade secrets. In vacating the district court's order, the Third Circuit held that for cases involving charges of attempt or conspiracy under the EEA, the government does not have to prove the existence of an actual trade secret, but, rather, that the defendants believed that the information they were seeking were trade secrets.

As discussed above, this holding should not require the government to show that the defendants consulted a lawyer who drew the legal conclusion that the documents were trade secrets. Rather, it should be sufficient to show that the defendant knew or firmly believed that the information was valuable to its owner because it was not generally known to the public and also that the owner had taken measures to protect it.

In so holding, the court reasoned that an attempt charge under the EEA requires proof of the same elements used in other modern attempt statutes, including the Model Penal Code. Therefore, a defendant is guilty of attempting to misappropriate trade secrets if, "acting with the kind of culpability otherwise required for commission of the crime, he . . . purposely does or omits to do anything that, under the circumstances as he believes them to be, is an act or omission constituting a substantial step in a course of conduct planned to culminate in his commission of the crime." Model Penal Code § 5.01(1)(c) (1985). In short, the defendant must (1) have the intent needed to commit a crime defined by the EEA, and (2) perform an act amounting to a "substantial step" toward the commission of that crime. Hsu, 155 F.3d at 202.

Based on these elements, the court explained that the government need not prove the existence of an actual trade secret, since "a defendant's culpability for a charge of attempt depends only on 'the circumstances as he believes them to be,' not as they really are." Id. at 203. Thus, the government can satisfy its burden under 18 U.S.C. § 1832(a)(4) by proving beyond a reasonable doubt that the defendants sought to acquire information that they believed to be a trade secret, regardless of whether the information actually qualified as such.

The Third Circuit also rejected the defendants' contention that disclosure of the trade secrets was required by a potential legal impossibility defense to charges of attempt and conspiracy under the EEA. The court first recognized that the Third Circuit was the only circuit court in the United States that still recognized a common law defense of legal impossibility to attempt charges. Although the Third Circuit had established the defense's validity for certain attempt crimes in United States v. Berrigan, 482 F.2d 171, 190 (3d Cir. 1973), it subsequently limited Berrigan's reach by recognizing several exceptions to the rule where the criminal statute at issue evidenced Congress' intent to foreclose an impossibility defense. See, e.g., United States v. Everett, 700 F.2d 900, 908 (3d Cir. 1983) (holding that legal impossibility was no defense to the charge of attempted distribution of a controlled substance).

The court summarily rejected the viability of a legal impossibility defense to the conspiracy charge, holding that because it is the conspiratorial agreement itself, and not the underlying substantive acts, that forms the basis for conspiracy charges, the impossibility of achieving the goal of a conspiracy is irrelevant to the crime itself. See Hsu, 155 F.3d at 203, (citing United States v. Wallach, 935 F.2d 445, 470 (2d Cir.1991)); United States v. LaBudda, 882 F.2d 244, 248 (7th Cir. 1989); United States v. Petit, 841 F.2d 1546, 1550 (11th Cir. 1988); United States v. Everett, 692 F.2d 596, 599 (9th Cir. 1982).

The court examined the EEA's legislative history and concluded that, like the drug statute at issue in Everett, Congress did not intend to permit a defense of impossibility to an "attempt" crime under the EEA: "the great weight of the EEA's legislative history evinces an intent to create a comprehensive solution to economic espionage, and we find it highly unlikely that Congress would have wanted the courts to thwart that solution by permitting defendants to assert the common law defense of legal impossibility." Hsu, 155 F.3d at 202.

The court also found it significant that the EEA was drafted in 1996, more than twenty-five years after the National Commission on Reform of the Federal Criminal Laws had concluded that the abolition of legal impossibility was already "the overwhelming modern position." Id. Lastly, the court noted that if legal impossibility were a defense to the attempted theft of trade secrets, the government would be forced to use actual trade secrets during undercover operations. The court then noted that this requirement would "have the bizarre effect of forcing the government to disclose trade secrets to the very persons suspected of trying to steal them, thus gutting enforcement efforts under the EEA." Id. Therefore, based on the legislative intent, and given the practical import of a contrary finding, the court held that legal impossibility is not a defense to a charge of attempted misappropriation of trade secrets in violation of 18 U.S.C. § 1832(a)(4).

Since the Third Circuit decision in the Hsu case, the only district court to consider the question of the required elements for attempt and conspiracy charges has followed Hsu's holding. See United States v. Pin Yen Yang, 1999 U.S. Dist. LEXIS 7130 (N.D. Ohio, Mar. 18 1999) ("[N]either conspiracy nor attempt to violate the EEA requires proof that the information sought to be obtained was actually a trade secret. The government need only demonstrate that the Defendants believed that the information they attempted to acquire was a trade secret.").

The owner of a trade secret, unlike the holder of a patent, does not have an absolute monopoly on the information or data that comprises the trade secret. Other companies and individuals have the right to discover the elements of a trade secret through their own research and hard work. Thus, there is no misappropriation if a defendant demonstrates that he independently developed information that constitutes another's "trade secret."

Similarly, a person can legally discover the elements of a trade secret by "reverse engineering": the practice of taking something apart to determine how it was made or manufactured. See, e.g., Kewanee Oil Co., 416 U.S. at 476 (stating that the law does not protect the owner of a trade secret from "discovery by fair and honest means, such as independent invention, accidental disclosure, or by so-called reverse engineering"). The EEA does not expressly address when reverse engineering is a valid defense; however, the legislative history suggests that "the important thing is to focus on whether the accused has committed one of the prohibited acts of this statute rather than whether he or she has reverse engineered. If someone has lawfully gained access to a trade secret and can replicate it without violating copyright, patent, or this law, then that form of 'reverse engineering' should be fine." 142 Cong. Rec. S12201, S12212 (daily ed. Oct. 2, 1996).

As noted, the EEA does not apply to individuals who seek to capitalize on their lawfully developed knowledge, skill, or abilities. Employees, for example, who change employers or start their own companies cannot be prosecuted based on an assertion that they were exposed to a trade secret while employed, unless the government can establish that they stole or misappropriated a particular trade secret. The legislative history makes clear that "[t]he government can not prosecute an individual for taking advantage of the general knowledge and skills or experience that he or she obtains or comes by during his tenure with a company. Allowing such prosecutions to go forward and allowing the risk of such charges to be brought would unduly endanger legitimate and desirable economic behavior." 142 Cong. Rec. S12201, 12213 (daily ed., Oct. 2, 1996). This does not mean, however, that employees who leave their employers to start their own companies can never be prosecuted under the EEA. In cases where employees steal or without authorization appropriate a trade secret from their employer, they may be prosecuted under 18 U.S.C. § 1832, assuming, of course, that the other elements can also be satisfied. Clear evidence of theft or copying is helpful in all cases to overcome the potential problem of prosecuting the defendant's "mental recollections" and a defense that "great minds think alike." However, where the actions of a departing former employee are unclear and evidence of theft has not been discovered, it may be advisable to allow the company to pursue its civil remedies and make a subsequent referral, if additional evidence of theft is developed.

In most instances, if the government can establish that the defendant intended for the misappropriation to benefit a third party economically, the defendant should not be able to claim successfully that the First Amendment of the Constitution protected the disclosure of the trade secret. In other words, if the defendant's motivation was pecuniary, the defendant cannot very well argue that he disclosed the secret as a public service or to educate the public. Further, courts also have rejected a First Amendment defense if the speech itself is the very vehicle of the crime. See, e.g., United States v. Morrison, 844 F.2d 1057, 1068 (4th Cir.) (rejecting defendant's First Amendment defense, upholding a conviction for a violation of 18 U.S.C. § 641 for stealing secret government documents, and noting that, "[w]e do not think that the First Amendment offers asylum . . . just because the transmittal was to a representative of the press"), cert. denied, 488 U.S. 908 (1988); United States v. Rowlee, 899 F.2d 1275 (2d Cir.) (rejecting assertion of First Amendment protection in tax evasion conspiracy case), cert. denied, 498 U.S. 828 (1990). Additionally, in United States v. Riggs, 743 F. Supp. 556, 560-61 (N.D. Ill. 1990), the court rejected defendant's assertion that the First Amendment provides a defense to a charge under 18 U.S.C. § 2314 for the interstate transportation of stolen computer files:

In short, the court finds no support for [defendant's] argument that the criminal activities with which he is charged . . . are protected by the First Amendment. Interpreting the First Amendment as shielding [defendant] from criminal liability would open a gaping hole in criminal law; individuals could violate criminal laws with impunity simply by engaging in criminal activities which involve speech-related activity. The First Amendment does not countenance that kind of end run around criminal law.

Since a claim of First Amendment protection is irrelevant to the defendant's illegal activities, the government should consider seeking an in limine order precluding the introduction of such evidence in appropriate cases.

The EEA is violated only where someone acts knowingly without authorization. Under certain circumstances, however, two individuals or companies may have a legitimate dispute over ownership rights in a trade secret. This type of dispute is likely to arise where the two potential owners previously worked together to develop the disputed technology and where the contractual arrangements governing each party's respective ownership interests are unclear or entirely absent. In these circumstances, unilateral action with regard to the trade secret by one of the owners may precipitate an EEA criminal referral. Such cases are rarely appropriate for criminal prosecution, especially where the party taking unilateral action has obtained advice of counsel. Notwithstanding the passage of the EEA, many disputes regarding ownership of intellectual property, including trade secrets, continue to be best resolved in a civil forum.

VIII.B.6.f. Statutory challenges

Several of the defendants in the first twenty cases brought under the EEA have attempted to challenge the statute, alleging, among other claims, that various provisions are vague or otherwise unconstitutional. Thus far, all such challenges have been rejected. Of these challenges, however, only United States v. Hsu, 40 F. Supp.2d 623 (E.D. Pa. 1999) (a challenge leveled after the remand from the Third Circuit) resulted in a published opinion.

In Hsu, the defendant moved to dismiss charges of conspiracy to steal and attempted theft of trade secrets, asserting that the EEA is unconstitutionally vague in two respects: (1) it fails to define the term "related to or included in" a product that is produced for or placed in interstate or foreign commerce and (2) the definition of "trade secret" in 18 U.S.C. § 1839(3) offends due process with its vagueness because it does not define either "reasonable measures" to keep the information secret, or what is meant by information not being "generally known" or "readily ascertainable" to the public. See 18 U.S.C. § 1839(3).

In denying the motion, the court noted that the void for vagueness doctrine does not mean that a statute is unconstitutionally vague where "Congress might, without difficulty, have chosen 'clearer and more precise language' equally capable of achieving the end which it sought." Hsu, 40 F. Supp.2d at 626. The court also held that since the First Amendment was not implicated, Hsu's void for vagueness challenge could only succeed if the statute were vague as applied to his conduct and not based on some hypothetical case. Id. The court summarily rejected Hsu's claim that free expression issues were implicated because the Bristol-Meyers Squibb employee who aided the Government "sting" operation by posing as a corrupt employee has a right to freely express himself and exchange information with the defendant, or with anyone else he thinks is a potential employer. The court noted first that Hsu lacked standing to raise the employee's First Amendment rights claim, and that even if Hsu had standing, the employee had knowingly participated in a Government sting operation, not in a job interview with a potential employer. Therefore, no First Amendment interests were implicated.

The court then rejected Hsu's argument that the term "related to or included in a product that is produced for or placed in interstate or foreign commerce" is unacceptably vague. The court found that prior First Amendment decisions disapproving of the term "related" had no bearing on the use of "related to or included in" in the EEA, which the court found "readily understandable to one of ordinary intelligence, particularly where, as here, the defendant was well versed in the nature of the technology at issue." Id.

The court also concluded that the EEA's definition of "trade secret" was not unconstitutionally vague as applied to Hsu. As to the prong of the definition mandating that the owner take "reasonable measures" to keep the information secret, the court dismissed the argument that the mere use of the word "reasonable" or "unreasonable" renders a statute vague. Id.

VIII.B.7. Criminal forfeiture

The EEA also provides that the court imposing sentencing shall order the forfeiture of any proceeds or property derived from violations of the EEA, and may order the forfeiture of any property used to commit or to facilitate the commission of the crime. The statutory language of the first subsection is mandatory and leaves the judge no discretion. See 18 U.S.C. § 1834(a)(1). With regard to the latter provision, however, the court may in its discretion take into consideration "the nature, scope, and proportionality of the use of the property in the offense." 18 U.S.C. § 1834(a)(2). The intent of that limitation is to insure that the amount and character of the forfeited property is proportionate to the harm caused by the defendant's conduct.

In the early cases prosecuted under the EEA, discretionary forfeiture has been sought for computer systems owned by the defendant and used to store and transfer trade secrets belonging to the victim. As a procedural matter, indictments alleging a violation of either 18 U.S.C. § 1831 or § 1832 should contain, where appropriate, a forfeiture paragraph.

VIII.B.8. Civil proceedings

While the EEA does not provide for civil forfeiture proceedings, it does authorize the government to file a civil action seeking injunctive relief. See 18 U.S.C. § 1836(a). Prosecutors should consider seeking injunctive relief to prevent further disclosure of the trade secret while conducting a criminal investigation or in cases in which a defendant's conduct does not warrant criminal prosecution. Prosecutors should also consider using this portion of the statute, in combination with consent decrees, to enjoin any third-party recipients of the trade secret from distributing or making use of the trade secret materials.

VIII.B.9. Confidentiality and the use of protective orders

Victims of trade secret thefts are often faced with a dilemma when deciding whether to report the matter to law enforcement authorities. Generally, victims do not want the thief to go unpunished but are concerned that if they report the matter, the trade secret will be disclosed during discovery or during the criminal trial. In drafting the EEA, Congress recognized this issue and, to encourage reporting, sought to preserve the confidentiality of trade secrets, if possible, throughout the prosecution. The EEA provides that the court "shall enter such orders and take such action as may be necessary and appropriate to preserve the confidentiality of trade secrets, consistent with the requirements of the Federal Rules of Criminal and Civil Procedure, the Federal Rules of Evidence, and all other applicable laws." 18 U.S.C. § 1835. This section also provides for interlocutory appeals from a decision or a court order authorizing the disclosure of any trade secret. Id. Therefore, prosecutors are strongly encouraged to seek the entry of orders that will preserve the status of the information as a trade secret and prevent its unnecessary and harmful disclosure.

A variety of steps may be taken to protect the confidentiality of information. Among the solutions employed in the first cases brought under the EEA were: protective orders during discovery, redacted documents, sealed exhibits, and the use of courtroom video monitors to display documents to the court and jury but not the public.

On at least one other occasion, a courtroom has been sealed during the sentencing phase of the proceeding to avoid disclosure of proprietary business information relating to the damages caused by the theft of trade secrets.

NOTE: Courts can limit the disclosure of information to the public even during the trial without necessarily violating the defendant's right to a public trial under the Sixth Amendment. While the right to a public criminal trial was incorporated into the Constitution by the Sixth Amendment, the right is not absolute and may be limited in certain circumstances. See Richmond News Papers, Inc. v. Virginia, 448 U.S. 555, 599-600 (1980) (Stewart, J. concurring); see also Gannett v. Depasquale, 443 U.S. 368, 422-33 (1979) (Marshall, J., concurring in part and dissenting in part) (tracing the history of the right to a public trial and citing cases where that right has been limited); State ex rel. La Crosse Tribune v. Circuit Court, 340 N.W.2d 460, 466-67 (Wis. 1983) (citing State ex rel. Ampco Metal, Inc. v. O'Neil, 78 N.W.2d 921 (Wis. 1956)) (both discussing inherent power of a court to limit the public nature of trials).

Prosecutors should be aware of the procedures in the federal regulations and Department of Justice guidelines requiring approval of the Deputy Attorney General before requesting that a courtroom be sealed. See 28 C.F.R. § 50.9; U.S. Attorneys' Manual § 9-5.150. Whenever authorization to close a judicial proceeding is being sought pursuant to 28 C.F.R. § 50.9 in a case or matter under the supervision of the Criminal Division, the Policy and Statutory Enforcement Unit, Office of Enforcement Operations should be contacted. In cases or matters under the supervision of other divisions of the Department of Justice, the appropriate division should be contacted. The Office of Enforcement Operations may be contacted at (202) 514- 3684.

Prosecutors should continue to seek to use these procedures and other measures to limit the potential for disclosures of trade secrets throughout the criminal proceeding in the most appropriate manner.

Protective orders have been utilized in several EEA cases and their use was expressly sanctioned by the Third Circuit in the Hsu decision described above. The dispute in Hsu centered around the government's motion for a protective order pursuant to 18 U.S.C. § 1835 and Fed. R. Crim. P. 16(d)(1) that would have permitted the government to disclose to the defendants only redacted versions of the documents used in the EEA sting operation and the defendants' opposing request for unredacted copies of the same documents. The proposal advanced by the defendants required the government to provide the trade secret information to the defendants, their attorneys and their experts under a protective order that restricted the use of the documents to the criminal litigation and would have required the return or destruction of the documents at the end of the case. The district court's decision to adopt the defendants' version of the order precipitated the interlocutory appeal of the United States. See United States v. Hsu, 982 F. Supp. 1022 (E.D. Pa. 1997).

On appeal, the Third Circuit determined that 18 U.S.C. § 1835 of the EEA clearly demonstrates Congress' intent to protect the confidentiality of trade secrets to the fullest extent possible under the law. Hsu, 155 F.3d at 196. While recognizing that such protection does not abrogate existing constitutional and statutory protections for criminal defendants, the court held that the government's proposed order did not violate the defendants' constitutional rights under the facts of the case because "a defendant's culpability for a charge of attempt depends only on 'the circumstances as he believes them to be,' not as they really are," and the actual trade secret documents were irrelevant to that inquiry.

NOTE: Because the indictment did not charge a completed theft, the Third Circuit refrained from addressing the district court's conclusion that in a case charging a completed offense, actual trade secrets must be disclosed to defendants. The Third Circuit characterized this question as a "complex issue," noting that the definition of trade secret expressed in the EEA "raise[s] an issue as to whether the information or formula itself is in fact material to the existence of the trade secret." Id. at n.15. Thus, the issue of the government's disclosure obligations in a completed offense case has not yet been resolved.

As to the defendants' claim that the trade secrets were also material to the preparation of other defenses, including entrapment and outrageous government conduct, the court was openly skeptical "of the materiality, let alone relevance, of the redacted information to these issues." Id. at 204. However, because these arguments had been raised for the first time on appeal, the court remanded these issues to the district court. Id.

On remand, the district court rejected the defendants' arguments that they were entitled to received unredacted trade secret documents under Fed. R. Crim. P. 16(a)(1)(C), and found that the unredacted documents were not relevant to the defenses of entrapment and outrageous government conduct. Just as the government need not use actual controlled substances during a drug "sting" operation for a drug defendant to allege that he was induced by the Government and was not predisposed to commit the crime, whether the trade secrets used by the government in an EEA "sting" operation were real or "dummy" secrets has no effect on an entrapment defense. Id. at 198 n.19. The court similarly rejected the defendants' arguments based on the defenses of document integrity and the chain of custody, concluding that these defenses can also be resolved without the objects at issue. Id. at 199. The court also rejected the defendants' argument that the government and Bristol-Meyers waived the confidentiality of the trade secrets when they showed the documents voluntarily during the sting operation. Id.

Finally, after an in camera review by a court-appointed technical advisor who had taken an oath of confidentiality, the court rejected the defendants' argument that if shown the documents in their unredacted form, they could prove that the information contained in the documents was in the public domain. Based on the technical advisor's analysis, the court concluded that the largest category of redactions, consisting of "specific examples of experimental conditions," satisfied the statutory definition of a trade secret contained in 18 U.S.C. § 1839(3) (the expert also identified a second category of redactions that in his view were less strictly tied to the practice of the art and did not meet the statutory definition of a trade secret because they did not derive any independent economic benefit or value; the court ordered that these portions be disclosed to defendants). After reviewing this category of redactions in camera, and consulting with the expert, the court held that the redactions were properly made to avoid disclosure of trade secret information within the meaning of the Economic Espionage Act. Id. at 200.

Taken together, the Third Circuit's opinion in Hsu and the district court's opinion on remand suggest that courts will recognize and respect the Congressional directive to take appropriate measures to preserve the confidentiality of trade secrets throughout the criminal process.

VIII.B.10. Extraterritoriality In order to rebut the general presumption against the extraterritoriality of U.S. criminal laws, Congress made it clear that the EEA is meant to apply to specified conduct occurring outside the United States. To ensure that there is sufficient nexus to U.S. interests, the EEA applies to conduct occurring outside the United States if: (1) the offender is a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof; or (2) an act in furtherance of the offense was committed in the United States. See 18 U.S.C. § 1837.

VIII.B.11. Department of Justice oversight Prior to the passage of the EEA, the Attorney General assured Congress in writing that for a period of five years, the Department of Justice would require that all prosecutions brought under the EEA must first be approved by the Attorney General, the Deputy Attorney General, or the Assistant Attorney General of the Criminal Division. This requirement has since been codified at 28 C.F.R. § 0.64-5 and is interpreted to apply to the filing of complaints, indictments and civil proceedings, but not to search warrant applications or other investigative measures. Pursuant to this requirement, the Computer Crime and Intellectual Property Section of the Criminal Division of the Department of Justice has been designated to coordinate requests for approval for 18 U.S.C. § 1832 cases. The Internal Security Section coordinates requests for approval for 18 U.S.C. § 1831 cases.

VIII.C. Sentencing and Restitution

Because the sentence in an EEA case will be largely driven by the value of the misappropriated property, a sentencing under the EEA can be complex, involving the testimony of both fact and expert witnesses.

VIII.C.1. Offense level

The applicable guideline for violations of 18 U.S.C.§§ 1831 and 1832 is U.S.S.G. § 2B1.1, which specifies a base offense level of four. That base offense level is increased two points if the defendant knew or intended the offense to benefit a foreign government, foreign instrumentality, or foreign agent. See U.S. Sentencing Guidelines Manual § 2B1.1(b)(7) (1999). It will often be the case that the offense will also have involved more than minimal planning, mandating another two point increase.

If a defendant is convicted of solely on conspiracy or attempt violations, U.S.S.G. § 2X1.1 instructs courts to decrease the base offense level three levels "unless the defendant completed all the acts the defendant believed necessary for successful completion of the substantive offense or the circumstances demonstrate that the defendant was about to complete all such acts but for apprehension or interruption by some similar event beyond the defendant's control." U.S. Sentencing Guidelines Manual § 2X1.1(b)(1) (1999). In most attempt cases resulting from undercover operations, the three point reduction will not apply.

VIII.C.2. Loss

Under U.S.S.G. § 2B1.1(b)(1), the court shall increase the offense level according to the specific amount of the "loss" inflicted by the theft. Under U.S.S.G. § 2B1.1, "loss" is defined as "fair market value of the property taken, damaged, or destroyed. Fair market value is the appropriate inquiry because the "value of the property taken . . . is an indicator of both the harm to the victim and the gain to the defendant." U.S. Sentencing Guidelines Manual § 2B1.1, cmt. (1999). Where the market value is difficult to ascertain or inadequate to measure harm to the victim, the court may measure loss in some other way, such as reasonable replacement cost to the victim." U.S. Sentencing Guidelines Manual § 2B1.1, app. n.2 (1999). U.S.S.G. § 2B1.1 also instructs that "loss need not be determined with precision. The court need only make a reasonable estimate of the loss given the available information." U.S. Sentencing Guidelines Manual § 2B1.1, app. n.3 (1999).

The only existing case law concerning the proper measure of loss in trade secret cases has arisen from civil cases decided pursuant to the Uniform Trade Secret Act. Despite the large number of such cases, it remains true that "the general law as to the proper measure of damages in a trade secret case is far from uniform." Telex Corp. v. Int'l Bus. Machs. Corp., 510 F.2d 894, 930 (10th Cir. 1975) (concerning allegations of unfair competition and misappropriation of trade secrets and confidential information relating to electronic data processing systems). Instead of offering well-settled rules, these decisions demonstrate that courts tend to exercise broad latitude in measuring damages. Even Section 3 of the Uniform Trade Secrets Act offers several alternative methods that can be employed in such cases:

Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret.

In determining damages under the UTSA, courts vary between determining the market value of the trade secret based on the loss inflicted on the victim or the gain accrued by the defendant, depending on which appears to be either the more reliable or the greater measure given the particular circumstances of the theft. See University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974) (involving computer company's suit for breach of joint venture agreement, misappropriation of plaintiff's computer system, and violation of a noncompetition agreement); Vermont Microsystems, Inc. v. Autodesk Inc., 138 F.3d 449, 452 (2d Cir. 1998) ("[T]he amount of damages recoverable in any action for misappropriation of trade secrets may be measured either by the plaintiff's losses or by the profits unjustly received by the defendant.").

In circumstances where the value of the trade secret to the plaintiff has not been completely destroyed (as often will be the case in the majority of Economic Espionage Act prosecutions) courts determining damages for theft of trade secrets under the Uniform Trade Secret Act have most often focused on the gain to the defendant as the proper measure of market value. In such circumstances, focusing solely on the loss suffered by the defendant would understate the magnitude of the harm suffered and inadequately punish the wrongdoer. If loss to the victim were the only appropriate measure of damages, someone caught red-handed stealing trade secrets could not be punished if the information had not yet been used to the owner's detriment. See University Computing, 504 F.2d at 536 (holding that damages for misappropriation of trade secrets are measured by the value of the secret to the defendant "where the trade secret has not been destroyed and where the plaintiff is unable to prove specific injury"); Salisbury Med. Labs., Inc. v. Merieux Labs., Inc., 908 F.2d 706, 714 (11th Cir. 1990) (ruling that under Georgia's UTSA, damages for misappropriation of trade secrets should be based on the defendant's gain).

In criminal cases where the defendant may not have yet used the misappropriated trade secret, the gain to the defendant should be measured by the value of the information that the defendant received. This is consistent with the general approach of the Sentencing Guidelines, which state that "loss" is based on the value of the stolen property even where the stolen property is recovered immediately. See U.S. Sentencing Guidelines Manual. § 2B1.1, app. n.2 (1999). This is also consistent with the approach set out in U.S.S.G. § 2X1.1, which indicates that "[i]n an attempted theft, the value of the items that the defendant attempted to steal would be considered." Id. § 2X1.1, app. n.2 (1999). See alsoid. § 2F1.1, app. n.7 ("Consistent with the provisions of § 2X1.1 (Attempt, Solicitation, or Conspiracy), if an intended loss that the defendant was attempting to inflict can be determined, this figure will be used if it is greater than the actual loss.").

One method commonly used to determine the market value of stolen trade secret information is to calculate the amount the thief would have had to pay in license or royalty fees had he legitimately licensed the stolen technology. This measure of damages is known as the "reasonable royalty approach." Another method is to value the information at what it would have cost the defendants to have developed the information independently, which is usually determined based on the victim's historical research and development costs. This method, known as the "replacement cost" method is endorsed by an application note to U.S.S.G. § 2B1.1 in circumstances where the market value is otherwise difficult to ascertain. See U.S. Sentencing Guidelines Manual § 2B1.1 applic. n.2.

Of these two approaches, in circumstances where the defendant has not yet realized a sufficient profit from the information he stole so as to provide a ready indication of market value, a "reasonable royalty" or "forced licensing" measure of damages should be applied. See Vitor Corp. of Am. v. Hall Chem. Co., 292 F.2d 678, 683 (6th Cir. 1961) ("If actual value can be ascertained by a reasonable apportionment of profits and damages, that course should be pursued. But if this cannot be accomplished, the nature of its invention, its utility, and advantages and extent of use involved are elements to be considered in determining a reasonable royalty."); see also Vermont Microsystems, Inc., 138 F.3d at 450 (holding that a reasonable royalty should be the measure of damages and that "reasonable royalty is a common form of award in both trade secrets and patent cases"); Uniform Trade Secret Act § 3(a) ("[I]n lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator's unauthorized disclosure or use of a trade secret."). Other federal cases in which the "reasonable royalty" approach was used include: Molex, Inc. v. Nolen, 759 F.2d 474 (5th Cir. 1985); University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518 (5th Cir. 1974); Carter Prods., Inc. v. Colgate-Palmolive Co., 214 F. Supp. 383 (D. Md. 1963).

In Vitor Corp., the Sixth Circuit explained why the reasonable royalty measure of damages most closely determines the value of misappropriated information in cases involving an absence of actual lost profits or sales:

To adopt a reasonable royalty as a measure of damages is to adopt and interpret as well as may be the fiction that a license was to be granted at the time of the infringement and then to determine what the license price should have been. In effect, the Court assumes the existence ab initio of and declares the equitable terms of a supposition license and does this nunc pro tunc. It creates and applies retrospectively a compulsory license. The primary inquiry is what the parties would have agreed upon if both were reasonably trying to reach an agreement. Pecuniary loss in any event can be determined by reasonable approximation. The actual value of what has been appropriated is always the ultimate in appraisement. If actual value can be ascertained by a reasonable apportionment of profits and damages, that course should be pursued. But if this cannot be accomplished, the nature of the invention, its utility, and advantages and extent of use involved are elements to be considered in determining a reasonable royalty.

Vitor Corp. of America v. Hall Chem. Co., 292 F.2d 678, 682-83 (6th Cir. 1961) (citing Egry Register Co. v. Standard Register Co., 23 F.2d 438 (6th Cir. 1928)).

Because civil trade secret cases generally require the plaintiff to prove the defendant's use of the stolen trade secrets, the "reasonable royalty" measure may be easier to apply because the nature of the defendant's use of the technology has already occurred. In cases where the defendant has not yet manifested his intention to use the stolen technology and there is no readily ascertainable reference for determining a reasonable royalty, this approach may prove more difficult and may unduly prolong or complicate the sentencing process. In such circumstances, it may be preferable to use the "replacement cost" measure. A victim's research and development costs have been used to measure replacement cost in appropriate circumstances in civil trade secret cases. For example, in University Computing, the court noted that using the plaintiff's research and development costs alone were appropriate in cases "where the trade secret was used by the defendant in a limited number of situations, where the plaintiff was not in direct competition with the defendant, where the development of the secret did not require substantial improvements in existing trade practices, and where the defendant's use of the trade secret had ceased." Id. at 538. Other courts have also adopted this approach to establish the proper measure of "loss" in trade secret cases. See Salsbury Labs. Inc. v. Merieux Labs. Inc., 908 F.2d at 714 (holding that research and development costs for misappropriated vaccine were proper measure of damages). This same approach was adopted in a criminal mail fraud case in United States v. Wilson, 900 F.2d 1350, 1356 (9th Cir. 1990):

As the district court recognized, the figures [the defendant] advocates are relevant in a market for industrial espionage, but not necessarily in an open market: "In my view stolen information always commands less than legitimate information so I think in terms of market value is has got to be many times higher." Yet the district court was faced with a virtually nonexistent open market. The evidence presented by both Wilson and the Government illustrated the uniqueness of the information and the limited application such information would have, even to one of the few companies who could make any use of it. It was not clearly erroneous for this district court to find that market value was difficult to ascertain in these circumstances. Moreover, we give due deference to the court's decision to measure [the victim's] loss according to the company's development costs and find that the court's computation under a development cost analysis also was not clearly erroneous.

Because the "replacement cost" measure is specifically cited in the Sentencing Guidelines, using the victim's research and development costs should be acceptable in cases where a "reasonable royalty" calculation is impossible or impracticable. In both EEA cases thus far that have involved contested sentencing hearings on the issue of loss, the courts have used some variation of the victim's research and development costs to measure the value of the information taken by the defendants.

VIII.C.3. Restitution

The Mandatory Victims Restitution Act of 1996 ("MVRA"), codified at 18 U.S.C. § 3663A, requires that restitution be made in all sentencing proceedings for convictions of, among others, any "offense against property, including any offense committed by fraud and deceit," and "in which an identifiable victim or victims has suffered a physical injury or pecuniary loss." See 18 U.S.C. § 3663A(c)(1) (A)(ii) and (B). For cases specifically involving "damage to or loss or destruction of property of a victim of the offense, the MVRA requires that the defendant return the property to its owner. If return of the property is "impossible, impracticable, or inadequate," the MVRA requires the defendant to pay an amount equal to the greater of the value of the property on the date of its damage destruction or loss, or its value at the time of sentencing, less the value of any part of the property that is returned. See 18 U.S.C. § 3663A(b)(1). Because the physical return of stolen trade secrets will be inadequate in most circumstances to compensate a victim for its damages due to the theft and disclosure of such information, restitution in the amount of the value of the stolen trade secrets will often be required. Under the MVRA, such restitution must be ordered "to each victim in the full amount of the victim's losses as determined by the court and without consideration of the economic circumstances of the defendant." 18 U.S.C. § 3664(f)(1)(A).

Although the Economic Espionage Act had not yet been passed at the time that 18 U.S.C. § 3663A was enacted, the theft of trade secrets should fall under the description of offenses contained in § 3663A. The legislative history of the provision indicates that mandatory restitution is intended to apply to "violent crimes, property and fraud crimes under title 18, product tampering, and certain drug crimes." S. Rep. No. 104-179 (1995) (emphasis added). The sentencing guidelines specifically describe theft as "one of the most basic forms of property offenses." Accordingly, the theft of trade secrets should be a qualifying offense against property for purposes of the mandatory restitution statute. As noted, the mandatory restitution statute also applies for any offense where "an identifiable victim has suffered a physical injury or a pecuniary loss." 18 U.S.C. § 3663A(c)(1)(B). Thus, to the extent a court has already calculated the loss or injury actually suffered by a victim of trade secret theft in determining the Offense Level under U.S.S.G. § 2B1.1, the same amount could be used for restitution under the MVRA..

Theft of trade secrets and other proprietary information may violate a number of federal criminal statutes in addition to or instead of 18 U.S.C. §§ 1831-1832. Statutes commonly worth considering are: unlawfully accessing a protected computer to obtain information, 18 U.S.C. § 1030(a)(2); wire or mail fraud including the disclosure of information in violation of a confidential or fiduciary relationship, 18 U.S.C. §§ 1341, 1343, 1346; and the misappropriation and interstate transportation of property or goods, 18 U.S.C. §§ 2314-2315. Prosecutors should consider these other statutes as well as the EEA, 18 U.S.C. §§ 1831-1832. Charging both a violation of the Economic Espionage Act and another statute such as Interstate Transportation of Stolen Property or Wire Fraud arising from the same act or acts does not violate the Double Jeopardy Clause of the Fifth Amendment of the Constitution since "each offense contains an element not contained in the other." United States v. Dixon, 509 U.S. 688, 690 (1993) (citing Blockburger v. United States, 284 U.S. 299, 304 (1932)). If prosecutors decide not to pursue a case federally, they should consider referring the case to state authorities for prosecution. Many states have laws that specifically address the theft of information, and even if a state does not have such a law, a defendant may often be successfully prosecuted under a more general theft statute.

In many cases of misappropriated proprietary information, the defendant acquired information by unauthorized access to a computer. In such cases, prosecutors should consider charging the defendant with a violation of 18 U.S.C. § 1030(a)(2)(A)-(C). Paragraph (A) is violated if the information is a financial record; paragraph (B) if the information was from any federal department or agency; and paragraph (C) if the information came from any "protected computer," as defined at section 1030(e)(2), and if the conduct involved an interstate or foreign communication. A protected computer is a computer used in interstate or foreign commerce or communication, or one used by a financial institution or the United States government exclusively (or in part, if the offense affects that use). 18 U.S.C. § 1030(e)(2).

"Information" as used in this subsection is to be broadly construed and includes information stored in intangible form. Moreover, the phrase "obtaining information" includes merely reading it -- there is no requirement that the information be printed out, copied or transported. This is important because, in an electronic environment, information can be "stolen" without transportation, and the original usually remains intact.

Violating 18 U.S.C. § 1030(a)(2) is a misdemeanor if the government does not prove any aggravating factors. 18 U.S.C. § 1030(c)(2)(A). This section does not require that the information obtained be confidential or secret in nature. Violating 18 U.S.C. § 1030(a)(2) is a felony if the government can prove that the offense was committed for financial, commercial, tortious or criminal purposes, or if the information can be valued at greater than $5,000. See 18 U.S.C. § 1030(c)(2)(B).

Prosecutors may also consider section 1030(a)(4), which is intended to provide punishment for those who misuse computers in schemes to defraud victims of property. This felony proscribes an individual from, knowingly and with intent to defraud, accessing a protected computer without authorization, or exceeding authorized access, and by means of such conduct furthering the intended fraud and obtaining anything of value, unless the object of the fraud and the thing obtained is computer time worth less than $5,000.

The mail and wire fraud statutes can also be used to prosecute misappropriation of proprietary information. For a more detailed discussion of 18 U.S.C. §§ 1341 and 1343, readers may refer to Chapter 43 of the U.S. Attorney's Manual and may contact the Fraud Section of the Criminal Division at (202) 514-7023 for further information and guidance.

The federal wire and mail fraud statutes proscribe the use of the mails or of interstate or foreign wire transmission, in furtherance of any scheme to defraud, or any scheme for obtaining "property" by false pretenses or representations. Appellate courts have upheld convictions under these statutes for the theft of trade secrets even where no violation of 18 U.S.C. § 2314 was found. See, e.g., Abbott v. United States, 239 F.2d 310 (5th Cir. 1956) (upholding defendant's conviction for use of mails to defraud in case involving illicit procurement of copies of oil company's geophysical maps). The broader scope results from the use of the word "property" in the mail and wire fraud statutes as compared to the far narrower phrase "goods, wares and merchandise" used in § 2314.

Courts have held that "property" includes intangible property, such as proprietary information. See, e.g., Carpenter v. United States, 484 U.S. 19 (1987). The defendant in Carpenter wrote the "Heard on the Street" column for The Wall Street Journal. Although these columns contained no insider information, they had the potential to affect the stock prices of companies discussed in the column because of the "quality and integrity" of the information. The defendant was charged with passing advance information on the columns to two co-conspirators who executed pre-publication trades and earned profits of $690,000. The Supreme Court held that the defendant had violated the wire fraud statute because the rightful owner of the information contained in the columns had been deprived of its right to the exclusive use of the information. 484 U.S. at 26.

By contrast, at least one appellate court has held that intangible property does not qualify as goods, wares or merchandise for § 2314. See United States v. Brown, 925 F.2d 1301 (10th Cir. 1991). Thus, these statutes provide a basis for prosecution when mails or wires are used in a misappropriation scheme. The mail and wire fraud statutes have been identically construed with respect to the issues discussed here. See, e.g., United States v. Von Barta, 635 F.2d 999, 1005 n.11 (2d Cir.) (reversing lower court's ruling and holding among other things that defendant's conduct in a securities scheme subjected him to prosecution for mail and wire fraud), cert. denied, 450 U.S. 998 (1981).

For example, in United States v. Seidlitz, 589 F.2d 152 (4th Cir.), cert. denied, 441 U.S. 922 (1979), the defendant used his knowledge of his former employer's computer system to enter the computer system and download computer data. The appellate court upheld the trial court's determination that the stolen data qualified as property within the meaning of the wire fraud statute. The court held that the data was a trade secret, even though similar information was in the public domain, because defendant's former employer had "invested substantial sums" to modify the system for its own needs. Further, the information had competitive value, and the employer took steps to prevent persons other than clients and employees from using the system. Id. at 160. Accordingly, there was sufficient evidence from which a jury could conclude that information stored in the computer system was "property" as used in 18 U.S.C. § 1343.

Prosecutors also should consider the applicability of the restored "intangible rights theory" found in 18 U.S.C. § 1346 for charging a defendant with fraudulent misappropriation of trade secret under §§ 1341 or 1343. Section 1346 was enacted in the wake of McNally v. United States, 483 U.S. 350 (1987), where the Supreme Court held that the mail fraud statute did not include schemes to defraud citizens of their intangible right to honest government, but was limited to protecting "property" rights. In a case under 18 U.S.C. § 1346, the defendant is charged not with fraudulently obtaining proprietary information, but rather with breaching the fiduciary duty of loyalty he owes to his employer by misappropriating the proprietary information. Under this theory, the government must prove that the defendant took steps to actively conceal the misappropriation. The United States is not, however, required to prove that the defendant realized any financial gain from the theft or attempted theft.

Illustrative of this theory is United States v. Kelly, 507 F. Supp. 495 (E.D. Pa. 1981), in which the two defendants were charged with mail fraud for unauthorized use of their company's computer time and storage facilities for the development of a private business venture. The jury found that the defendants defrauded Univac of their loyal and faithful services as employees, and used the mails in furtherance of their scheme. The court denied the defendants' post-trial motions arguing that their convictions should be overturned because the government failed to prove that the goal of the fraudulent scheme was to obtain money or some tangible property right from Univac. The court noted that a private employee may be convicted for mail fraud for failure to render honest and faithful services to his employer if he devises a scheme to deceive, mislead, or conceal material information. The evidence that the defendants violated company policy by extensively using their employer's computer facilities for their own gain, in combination with the steps they took to conceal their use from their employer, was sufficient to sustain the conviction.

Section 1905 statute provides for misdemeanor penalties for government employees who, inter alia, "divulge" or "disclose" government trade secrets. In the only reported decision involving the disclosure of confidential government information, the court in United States v. Wallington, 889 F.2d 573 (5th Cir. 1989), upheld the defendant's conviction for running background checks on several people who a friend of the defendant suspected of drug dealing.

The Interstate Transportation of Stolen Property Act ("ITSP"), 18 U.S.C. § 2314 imposes criminal liability on:

Whoever transports, transmits, or transfers in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.

See U.S. Attorney's Manual. §§ 9-61.260 - 9.61.261(A-D). 18 U.S.C. § 2315 addresses receiving stolen property, making it a crime to "receive, possess, conceal, store, barter, sell, or dispose" such property. In all other respects 18 U.S.C. §§ 2314 and 2315 are substantively identical.

In a proprietary information case, a prosecutor should prove the first element, the transportation in interstate commerce, in the same manner as with any other stolen goods, wares or other merchandise case, i.e., by establishing that valuable proprietary information was transported across state lines.

The statute does not define the terms goods, wares or merchandise and courts are divided on under what circumstances intangible property such as trade secrets constitutes "goods, wares or merchandise." In one case, the court dismissed the indictment for transporting the source code of a computer program from Georgia to New Mexico. United States v. Brown, 925 F.2d 1301 (10th Cir. 1991). The government admitted it could not prove either that the defendant copied the source code onto the company's diskettes or that the defendant had in his possession any tangible property belonging to the company. Id. at 1303. The Brown court held that "[p]urely intellectual property," such as the source code appropriated by the defendant, is not covered by 18 U.S.C. § 2314: "It can be represented physically, such as through writing on a page, but the underlying, intellectual property itself, remains intangible" and thus "cannot constitute goods, wares, merchandise which have been stolen, converted or taken within the meaning of § 2314 or 2315." 925 F.2d at 1307- 08. In reaching its decision the court relied upon United States v. Dowling, 473 U.S. 207 (1985).

The Brown court did distinguish a situation in which the defendant illegally appropriates a tangible item containing an intangible component, such as a chemical formula written on a stolen piece of paper. The court suggested that such an appropriation would violate 18 U.S.C. § 2314, even where the value of the paper itself is insignificant and the overall value is almost wholly derived from the intangible component. 925 F.2d at 1307-08 n.14 (citing United States v. Stegora, 849 F.2d 291, 292 (8th Cir. 1988)).

The court in United States v. Bottone, 365 F.2d 389 (2d Cir.), cert. denied, 385 U.S. 974 (1966), which pre-dates Dowling, reached the opposite result. The defendants in Bottone removed papers describing manufacturing processes from their place of employment and made copies outside the office. They returned the originals and then transported the copies in interstate commerce. In upholding defendants' convictions under 18 U.S.C. § 2314, Judge Friendly stated:

when the physical form of the stolen goods is secondary in every respect to the matter recorded in them, the transformation of the information in the stolen papers into a tangible object never possessed by the original owner should be deemed immaterial. It would offend common sense to hold that these defendants fall outside the statute simply because, in efforts to avoid detection, their confederates were at pains to restore the original papers to [their employer] and transport only copies or notes, although an oversight would have brought them within it.

365 F.2d at 394. Similarly, in United States v. Riggs, 739 F. Supp. 414, 420 (N.D. Ill. 1990), the court rejected the defendant's "disingenuous" argument that he merely transferred electronic impulses (albeit impulses containing computerized text files belonging to Bell South) across state lines. "This court sees no reason to hold differently simply because [defendant] stored the information inside computers instead of printing it out on paper. In either case, the information is in a transferrable, accessible, even salable form." Id. at 421.

NOTE: There are also at least two other decisions that, in general, support the position that transporting intangible property in interstate commerce violates 18 U.S.C. § 2314. However, both these cases involve the interstate transportation of illegal copies of copyrighted works and their continuing viability is suspect in light of the Supreme Court's decision in United States v. Dowling, which specifically held that 18 U.S.C. § 2314 does not reach the interstate transportation of unauthorized copies of copyrighted works. See United States v. Belmont, 715 F.2d 459 (9th Cir.) (holding that transporting in interstate commerce illegal "off the air" videotape copies of motion pictures protected by copyright violated 18 U.S.C. § 2314), cert. denied, 465 U.S. 1022 (1984); United States v. Gottesman, 724 F.2d 1517 (2d Cir. 1984) (holding among other things that intangible idea protected by copyright is effectively made tangible by its embodiment upon videotapes and thereby covered by the National Stolen Property Act) .

Despite Brown, where the defendant has transported the intellectual property within a stolen tangible medium -- for example, company paper or computer diskettes -- courts have uniformly found that section 2314 or section 2315 applies. See United States v. Lyons, 992 F.2d 1029, 1033 (10th Cir. 1993) ("The fact that the [defendant] stole the software in conjunction with the theft of tangible hardware distinguishes this case from Brown. Brown recognizes that the theft of intangible intellectual property in conjunction with the theft of tangible property falls within the ambit of § 2314."); United States v. Lester, 282 F.2d 750 (3d Cir.) (originals and copies of geophysical maps made by defendants on the victim's own copying equipment with the victim's supplies are covered under § 2314), cert. denied, 364 U.S. 937 (1961); United States v. Seagraves, 265 F.2d 876 (3d Cir. 1959) (same facts as Lester); United States v. Greenwald, 479 F.2d 320 (6th Cir.) (original documents containing trade secrets about fire retardation processes), cert. denied 414 U.S. 854 (1973); Hancock v. Decker, 379 F.2d 552 (5th Cir. 1967) (state conviction for theft of 59 copies of a computer program was supported by similar federal court rulings under § 2314, citing Seagraves).