Robert J. Lauchlan, Jr., is a partner in the San Diego, California office of McKenna & Cuneo, L.L.P. He is a former
Assistant U.S. Attorney with the U.S. Attorney's Office for the Southern District of California. Mr. Lauchlan is part of a team
of litigators experienced in cases involving intellectual property rights, trade secrets, and criminal defense.
Daniel M. Krainin is an associate at the San Diego, California office of McKenna & Cuneo, L.L.P.
He graduated from the University of Virginia School of Law in May 1997, and was admitted to the
California bar in December 1997.
The United States Congress often passes criminal laws for acts that were formerly punished by state statutes alone, or litigated exclusively in civil actions. A recent federal law (Pub. L. No. 104-294, 110 Stat. 3488, codified at 18 U.S.C. 1831 - 1839 (the "new federal law")) continues that trend. Under the new federal law, theft of secret economic information may be criminally prosecuted by the federal government. The disciplines of business law, labor law and intellectual property law may all be relevant to the defense of a case under the new federal law, which will often be highly technical. Moreover, because the law is so new, it represents uncharted territory for most criminal defense practitioners. Fortunately, guidance is available for those representing clients charged with violating the new federal law: many states have long-standing civil statutes which contain some of the same definitions of terms used in the new law.1 Criminal law practitioners confronting some of the first prosecutions brought under the new federal law may be able to draw on precedent derived from analogous state civil cases to defend their clients.
The new federal law makes theft of a trade secret a federal criminal offense. "Trade secret" is broadly defined by Section 1839(3) as:
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. The key elements of a trade secret are that (A) the owner has taken reasonable measures to keep information secret and (B) that secrecy adds independent economic value to the information. The definition presents fertile grounds for litigation. Part (A) of Section 1839(3) presents two main areas of contention.
First, who is the "owner" of the alleged trade secret? Given that secrecy is a hallmark, it may not be possible to determine ownership of a trade secret from copyright, patent or trademark documentation, which is publicly available. Indeed, the existence of such documentation would presumably dissuade the government from filing a case, for lack of evidence of reasonable measures to keep the information secret.2 Perhaps a private employment contract agreement exists whereby the defendant assigned her creative developments, ideas and research to her employer. Even assuming such a contract exists, it certainly will not conclusively identify the owner of a trade secret. Those contracts are typically signed near the beginning of employment, before any trade secrets to which they may apply are identified with any specificity. Also, litigants frequently contest whether the information supposedly protected by the contract was developed outside of the employment, or before the employment commenced. Perhaps there is no documentation whatsoever identifying the owner of the trade secret, and thus identity of the owner must be decided exclusively on the testimony and credibility of witnesses.3
Second, once the owner of the trade secret is established, the government must prove that he or she took "reasonable measures" to keep the information secret.4 Judging by cases brought under analogous state civil statutes, this will be a heavily litigated issue. Many courts have discussed the reasonableness of various internal measures taken by owners to protect commercially sensitive information. The inquiries are highly fact-specific, and are decided on the basis of the "totality of the circumstances."5
Although the outcome varies based upon the facts of each case, and may be somewhat different in a criminal setting, it is instructive to look at precedent from civil cases. Measures deemed reasonable to keep trade-sensitive information secret include: requiring employees to sign confidentiality agreements respecting trade secrets;6 advising employees of the existence of the trade secret and the need to maintain confidentiality of the information;7 not divulging information or divulging it only on a "need to know" basis;8 keeping secret documents in a locked, secure area;9 placing proprietary markings on information sought to be protected;10 constructing a plant to keep a secret process from public view;11 and limiting distribution of secret information to licensees who sign confidentiality restraints.12
In defending those accused of violating the new federal law, criminal defense attorneys should be on the lookout for acts or omissions by those with a proprietary interest that might indicate a lack of reasonable measures to keep commercially valuable information secret. Instances where courts have found that trade secret owners failed to take reasonable measures include: leaving secret information on computer hard drives that were sold to the purchaser of the secret-owner's assets;13 not having a contract, policy, or discussion with employees regarding confidentiality;14 not marking the material to indicate its purported confidentiality;15 not imposing adequate security controls on access to the material;16 and disclosing or disseminating the allegedly secret information to those who are under no obligation to keep it secret.17
Even where one of the precautions found to be "reasonable"18 was employed by the proprietor of the secret information, strong defense arguments may still be available. Many courts have recognized the above-listed efforts as "reasonable" only in contexts where more than one such measure was employed simultaneously.19 Also, the strength of the prosecution's evidence is a potential point of attack since the government bears the burden of proving that reasonable measures were actually taken -- as opposed to merely alleged or intended.20
Finally, the nature of the alleged trade secrets may be relevant. For example, where the information is not an obvious trade secret, heightened protection efforts may be required of the owner.21 Likewise, where significant portions of the alleged trade secret are publicly available, it may not be possible to protect the information at all, regardless of the measures taken.22
Under clause (B) of Section 1839(3), the government must prove that secrecy adds "independent economic value" to the information. As with the "reasonable measures" requirement, criminal defense attorneys handling matters under the new federal law may use this prong of the statute to attack the prosecution's case, by calling into question whether an actual "trade secret" exists in a given case. Again, analogous civil cases may be of help in analyzing the key phrase, "independent economic value."
Courts have found that secrecy adds economic value to information which, for example: contributes -- even "if only in small part" -- to the commercial attractiveness of a product;23 saves a future developer time, effort and resources;24 would be of great economic value to competitors;25 could not easily be acquired or correctly duplicated by others;26 or is the source of substantial revenue.27
Conversely, where any of the above attributes is not the case, a strong argument can be made that secrecy did not add "independent economic value" to the information and, therefore, was not protected as a trade secret. Moreover, courts routinely find that secrecy adds no independent economic value where the process or information is generally known or ascertainable from publicly accessible sources.28
Even if the government is able to prove the existence of a trade secret under Section 1839(3), it must also prove criminal misappropriation of the information. The prohibitions in the new federal law are not analogous to any existing state statutory language, thus courts and attorneys will neither be guided nor constrained on these issues by existing case law. These provisions, which will provide ample opportunity for creative lawyering by the defense bar, are outlined briefly below.
Theft To Benefit Foreign Government
Section 1831, entitled "Economic Espionage" provides that whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly (i) steals, or without authorization appropriates, takes, carries away, conceals, or by fraud, artifice, or deception obtains, a trade secret; (ii) without authorization, copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret; (iii) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization; (iv) attempts to commit any offense described in (i) through (iii); or (v) conspires with one or more other persons to commit any offense described in any of (i) through (iii), and one or more of such persons do any act to effect the object of the conspiracy, is guilty of a federal criminal offense. An individual is subject to a fine of not more than $500,000, imprisonment for not more than 15 years, or both. An organization is subject to a fine of not more than $10 million.Theft Involved in Interstate or Foreign Commerce
Section 1832, entitled "Theft of Trade Secrets," provides that 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 (i) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information; (ii) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information; (iii) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization; (iv) attempts to commit any offense described in (i) through (iii); or (v) conspires with one or more other persons to commit any offense described in any of (i) through (iii), and one or more of such persons do any act to effect the object of the conspiracy, is guilty of a federal criminal offense. An individual is subject to a fine of not more than $250,000,29 imprisonment for not more than 10 years, or both. An organization is subject to a fine of not more than $5 million.Criminal Forfeiture
Criminal forfeiture is to be ordered in connection with a violation of the new federal law. Section 1834 provides that the court, in imposing sentence on a person for a violation, shall order -- in addition to any other sentence imposed -- that the person forfeit to the United States (i) any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as a result of such violation; and (ii) any of the person's property used, or intended to be used, in any manner or part, to commit or facilitate the commission of such violation, if the court in its discretion so determines, taking into consideration the nature, scope, and proportionality of the use of the property in the offense.
Confidentiality
Section 1835 provides that in any prosecution under the federal law the court shall 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, the Federal Rules of Evidence, and all other applicable laws.Injunctive Relief
Section 1836 provides that the Attorney General may, in a civil action, obtain appropriate injunctive relief against any violation.Other Penalties
Other penalties include those associated with most criminal convictions, such as restitution,30 a special assessment, or penalty assessment31 and supervised release.32Conclusion
Prosecutions under the new federal law will involve many technical areas of the law in which neither the prosecutor nor the criminal defense attorney is likely to have practiced. Attorneys faced with defending some of the earliest prosecutions under the new federal law should take full advantage of civil trade secret case law, especially to the extent that it may be used to question the existence of a trade secret in the first place. Beyond that, a little creativity is likely to go a long way in efforts to defend actions brought under the relatively clean slate of prohibitions contained in the new federal law.Notes
1. See, e.g., Cal. Civ. Code 3246.1(d); Colo. Rev. Stat. 7-74-102(4); Ill. Rev. Stat. ch. 140, 352(d)(1); Iowa Code 550.2(4)(b); La. Rev. Stat. 51:1431(4); Md. Com. Law II Code Ann. 11-1201; Minn. Stat. 325C.01, subd. 5; Nev. Rev. Stat. 600A.030(4)(a); N.D. Cent. Code 47-25.1-01.2.b(4); Ore. Rev. Stat. 646.461(4).2. See notes 17 and 22, infra, and accompanying text.
3. The issue of trade secret ownership has arisen in disputes between insurers and agents over proprietary rights to customer lists and files. See, e.g., Nationwide Mutual Ins. Co. v. Stenger, 695 F. Supp. 688, 692 (D. Conn. 1988).
4. See 18 U.S.C. 1839(3)(A).
5. See K-2 Ski Co. v. Head Ski Co., Inc., 506 F.2d 471, 474 (9th Cir. 1974).
6. See MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir.), cert. denied, 510 U.S. 1033, 114 S. Ct. 671, 126 L.E.2d 640 (1993).
7. See Religious Technology Center v. Netcom On-Line Communication Servs., Inc., 923 F. Supp. 1231 (N.D. Cal. 1995); Ivy Mar Co., Inc. v. C.R. Seasons Ltd., 907 F. Supp. 547 (E.D.N.Y. 1995).
8. See Roton Barrier, Inc. v. The Stanley Works, 79 F.3d 1112, 1117-18 (Fed. Cir. 1996); Hoffman-LaRoche Inc. v. Yoder, 950 F. Supp. 1348, 1362 (S.D. Ohio 1997); Religious Technology Center, 923 F. Supp. 1231.
9. See Hoffman-LaRoche, 950 F. Supp. at 1362; Religious Technology Center, 923 F. Supp. 1231.
10. See Hoffman-LaRoche, 950 F. Supp. at 1348.
11. See E.I. duPont deNemours & Co. v. Christopher, 431 F.2d 1012, 1016 (5th Cir. 1970).
12. See Computer Assocs. Int'l, Inc. v. American Fundware, Inc., 831 F. Supp. 1516, 1524 (D. Colo. 1993).
13. See Defiance Button Machine Co. v. C&C Metal Products Corp., 759 F.2d 1053, 1063 (2d Cir. 1985).
14. See Hoffman-LaRoche, 950 F.2d at 1360; Gordon Employment, Inc. v. Jewell, 356 N.W.2d 738, 741 (Minn. Ct. App. 1984).
15. See Hoffman-LaRoche, 950 F.2d at 1361-62.
16. See id. at 1362.
17. See Hardwick Airmasters, Inc. v. Lennox Indus., 78 F.3d 1332, 1337 (8th Cir. 1996); Phillips v. Frey, 20 F.3d 623, 630 (5th Cir. 1994); Hoffman-LaRoche, 950 F. Supp. at 1362.
18. See notes 6-12, supra, and accompanying text.
19. See, e.g., Hoffman-LaRoche, 950 F. Supp at 1362; Religious Technology Center, 923 F. Supp. 1231. See also Ring Computer Sys., Inc. v. ParaData Computer Networks, Inc., 1990 WL 132615 at *2 (Minn. Ct. App. Sept. 18, 1990) (unpublished opinion) ("signing of confidentiality agreement, without more, is not enough").
20. See, e.g., Nordale, Inc. v. Samsco, Inc., 830 F. Supp. 1263, 1273-74 (D. Minn. 1993) (bare allegations that plaintiff maintained sufficient secrecy, without more, not sufficient to withstand summary judgment)
21. See, e.g., Nordale, 830 F. Supp. at 1274 (employer's efforts to keep customer lists confidential found "especially inadequate" given the non-intuitive nature of the claimed secrecy of the lists).
22. See, e.g., Vermont Microsystems, Inc. v. Autodesk, Inc., 88 F.3d 142, 149 (2nd Cir. 1996) (material that is subject under federal law to publication at the will of another is not protectible as trade secret); Alcolac, Inc. v. Wagoner, 610 F. Supp. 745, 749 (D. Mo. 1985) (alleged secret information not protectible where it is available to competitors by legitimate means not requiring the owner's consent);
23. Vermont Microsystems, 88 F.3d at 149.
24. See id.; Roton Barrier, Inc. v. The Stanley Works, 79 F.3d 1112, 1117 (Fed. Cir. 1996).
25. See Roton Barrier, 79 F.3d at 1117; Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655, 663 (4th Cir. 1993); Diamond v. T. Rowe Price Assocs., Inc., 852 F. Supp. 372 (D. Md. 1994).
26. See Roton Barrier, 79 F.3d at 1117.
27. See Religious Technology Center v. Netcom On-Line Communication Servs., Inc., 923 F. Supp. 1231 (N.D. Cal. 1995).
28. See Western Medical Consultants, Inc. v. Johnson, 80 F.3d 1331, 1337 (9th Cir. 1996); In re Remington Arms Co., 952 F.2d 1029, 1032 (8th Cir. 1991); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1500 (5th Cir. 1990); Hutchison v. KFC Corp., 883 F. Supp. 517 (D. Nev. 1993).
29. See 18 U.S.C. 3571(b)(3) and (e), 3559.
30. See 18 U.S.C. 3663.
31. See 18 U.S.C. 3013, 3559.
32. See 18 U.S.C. 3583, 3559.