Thursday, October 2, 2014

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BNA INSIGHTS: An Analysis of Economic Espionage Act Prosecutions: What Companies Can Learn From It and What the Government Should Be Doing About It!

Peter J. Toren

By Peter J. Toren, Weissbrod Matteis and Copley, Washington, D.C. 

I. Introduction

The Economic Espionage Act (EEA), 18 U.S.C. §§ 1831-91, was enacted 16 years ago to great fanfare and with the stated goal of better protecting critical U.S. corporate information from theft by foreign governments and unscrupulous competitors by criminalizing the theft of trade secrets. In signing the EEA, President Bill Clinton stated, “The act establishes a comprehensive and systematic approach to trade-secret theft and economic espionage.”  Since then, the federal government has brought approximately 124 prosecutions under the two separate provisions of the EEA.

The United States has now brought a sufficient number of prosecutions under the EEA to be able to draw conclusions about: (1) the location of the cases; (2) the extent of foreign government involvement; (3) defendant’s gender; (4) defendant’s level of education; (5) relationship of defendant to the victim; (6) nationality of the defendant/purpose of the theft; (7) type of trade secrets stolen; (8) identify of the victim; (9) adequacy of protective measures; (10) dispositions; and (11) sentences.

Based on these findings and conclusions, it is also possible to make meaningful conclusions and recommendations for both government and industry. With regard to the government, the findings suggest that it should be more aggressive in prosecuting violations of the EEA if it were truly serious about deterring thefts of trade secrets, and that the government has not been as active as claimed. Further, there is marked difference among U.S. Attorney’s Offices in the number of cases the office has charged under the EEA.

The effectiveness of the EEA in protecting trade secrets is also hampered by statutory limitations of the current version of the EEA. In particular, Congress should amend the EEA so that it unambiguously covers the theft of trade secrets to the extent permitted by the Commerce Clause, and that it also should protect trade secrets in the development stage. Finally, Congress should increase the penalties for theft of trade secrets not involving a foreign entity; more than 90 percent of the prosecutions, thus far, have not involved a foreign entity, and the defendant was sentenced to probation or home confinement in almost 40 percent of the cases.

With regard to industry, the findings indicate that companies are not doing enough to protect their valuable proprietary information and that the process of protecting trade secrets is organic, in that, all businesses should constantly update their trade secret protection programs in response to ever changing conditions and threats. For example, the threat of foreign economic espionage, especially by Chinese entities, has greatly increased over the past several years.

This article first discusses the background of the EEA. Based on a review and analysis of the approximate 124 EEA prosecutions brought by the government, it then provides a discussion of 11 specific findings, and makes conclusions and recommendations on how the government and industry can take steps to better protect trade secrets.

II. Background – The Economic Espionage Act

Prior to the passage of the EEA in 1996, there was only a single, very limited federal statute that directly prohibited the misappropriation of trade secrets.  As noted in the EEA’s legislative history, problems with prosecuting the theft of trade secrets under federal criminal law led U.S. Attorney’s Offices to decline matters that involved employees of U.S. corporations attempting to sell proprietary information to foreign governments.  Congress realized that the only practical way to protect the trade secrets of critical U.S. corporate information was to enact a single comprehensive scheme that could bring federal resources to bear against defendants who steal proprietary information.

The EEA criminalizes two distinct, but related types of trade secret misappropriation: Section 1831 punishes the misappropriation of trade secrets when knowingly undertaken by anyone “intending or knowing that the offense will benefit any foreign government, foreign instrumentality or foreign agent.”  This was originally the heart of the EEA, and was designed to cope with the problem of foreign economic espionage.

In contrast, Section 1832 is a general criminal trade secrets statute. Despite its inclusion in the EEA, it does not require evidence of foreign espionage. Rather, it applies to anyone who knowingly engages in any act of misappropriation “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.”

Defendants convicted of violating Section 1831 can be sentenced to up to 15 years imprisonment. In contrast, defendants convicted under Section 1832 can be sentenced to up to ten years imprisonment. Further, the statute carries a range of fines of up to $15,000,000 depending upon the nature of the offense. In addition to payment of fines, EEA violators are subject to the provisions of the Mandatory Victim’s Restitution Act (“MVRA”).  Finally, the EEA requires mandatory forfeiture to the government of property used, or intended to be used, in any manner or part to commit or facilitate the offense, as well as any property constituting or derived from any proceeds obtained directly or indirectly as a result of the commission of the offenses.

Pursuant to the U.S. Sentencing Guidelines, the imposition of an actual sentence under the EEA is largely based on the determination of the value of the misappropriated property and the loss caused by the theft.

III. Government Prosecutions Under the EEA

1. Number and Location of Cases
Findings:

The government has brought a total of 124 cases. As seen from the following chart and contrary to the government’s claims of increased prosecution of theft of trade secrets, the number of indictments has not dramatically increased since the enactment of the EEA. Indeed, the number of indictments from 2006-2011 was relatively flat and there were only five indictments in 2012 by Sept. 1, 2012…

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