To Catch an E-Thief — Under Federal Property Law

As businesses move away from paper documents, courts are poised to broaden ‘conversion’ definition.

BY NICK AKERMAN

The fundamental shift for busi­nesses in the past 15 years from paper documents to computer data has forced the courts to decide whether intan­gible electronic data should enjoy the same legal protections as physical property.

Because of this shift, it is important to review the judicial response to the electronic-data issue in the context of a feder­al criminal statute, the National Stolen Property Act (NSPA), and common law conversion.

The NSPA makes it a felony for one who “transports, transmits, or transfers in interstate or foreign commerce any goods, wares, mer­chandise … of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.”  Conversion is the state civil cause of action for the theft of property.

In 2013 , Yijia  Zhang, a computer- systems manager, was indicted for violating the NSPA, predicated on allegations that he stole 3,200 confidential data files belonging to his employer and transmitted them to Internet storage sites he maintained in Sweden and Germany.  In United States v. Zhang, the federal court in the Pennsylvania’s Eastern District granted Zhang’s motion to dismiss the NSPA charge on the ground that computer data is purely intangible property and that only tangible physical proper­ty is encompassed within the statute’s meaning of “goods,” “wares” or “merchandise.”

The court acknowledged that “goods,” “wares” or merchandise” are not defined in the statue and that “[i]t is an open question in the Third Circuit whether digital files can constitute goods, wares, or merchandise within the mean­ing of NSPA.”  Nonetheless, the court chose to follow precedent in the U.S. Court of Appeals in the First Circuit, United States v. Martin; in the Second Circuit, United States v. Aleynikov; in the Seventh Circuit, United States v. Stafford; and in the Tenth Circuit, United States v. Brown.  Those courts held that the NSPA only protects tangible physical proper­ty, not intangible computer data.

The recognized exception in these circuits is comput­er data connected to a physical object. For example, in United States v. Agrawal, the Second Circuit last year upheld the defendant’s conviction for violating the NSPA for stealing computer code by “printing the code onto thousands of sheets of paper, which he then physi­cally removed from [his employer’s] New York office to his New Jersey home.”

DICTIONARY MEANINGS

The circuit cases rejecting computer data from the ambit of the NSPA, other than the Second Circuit’s 2012 ruling in Aleynikov, were decided between 1991 and 2000 and relied upon law dat­ing back to 1959, prior to U.S. businesses shifting nearly all of their internal paper documents to electronic data.  In the Second Circuit case, Sergey Aleynikov, a computer programmer in The Goldman Sachs Group Inc.’s New York office, had been convict­ed under the NSPA for stealing Goldman’s confidential and pro­prietary high-frequency trading system.  Prior to resigning from Goldman, Aleynikov “up-load­ed to a server in Germany more than 500,000 lines of source code” from that trading system and subsequently took the source code with him to a meeting with a Goldman competitor.

Nowhere in Aleynikov or any of the other circuit opinions limit­ing “goods,” “wares” or “mer­chandise” to physical property, do any of the courts address the dictionary definition of these individual words and, in par­ticular, the word “goods,” which the Merriam-Webster Dictionary defines simply as “person­al property having intrinsic value.”  This omission is signifi­cant because the word “prop­erty” in turn has been interpret­ed by the U.S. Supreme Court in Carpenter v. United States in the mail and wire fraud statutes to include intangible as well as physical property.

Carpenter, handed down in 1987, upheld the conviction of a Wall Street Journal reporter who schemed with others to use pre­publication information from his regular column to trade in stocks, the prices of which were affected by the analyses in the published column. Although the Seventh Circuit’s 1998 decision in Stafford justified its restrictive definition of “goods” in the NSPA based, in part, on its enactment during the 1930s when computer data was nonexistent, Congress enacted the mail fraud statute some 60 years earlier in 1872.

Not all courts are technologi­cally tone deaf.  In 2007 the New York high court, the Court of Appeals, in Thyroff v. Nationwide Mutual Insurance Co., broadened the scope of conversion beyond physical property to include intangible computer data.  As the circuit courts have strained to find a connection to the physi­cal world in the NSPA, New York courts had previously adopted the “merger doctrine” requiring intangible property to “be united with a tangible object for conver­sion purposes.”  Conversion, for example, was a proper claim for the theft of intangible shares of company stock only because the shares were represented by a tan­gible stock certificate.

Thyroff abandoned the “merger doctrine” recognizing that “[a] document stored on a computer hard drive has the same value as a paper document kept in a file cabinet,” and that the law “must keep pace with the con­temporary realities of widespread computer use”—that “society’s reliance on computers and elec­tronic data is substantial, if not essential,” and “[c]omputers and digital information are ubiqui­tous and pervade all aspects of business, financial and personal communication activities.”

Although Thyroff is not universally accepted by all states, its underlying rationale is clearly the future.