Economic Espionage Act

FOR CORPORATE America, the Economic Espionage Act is a double-edged sword.  It can be used to protect a company’s intellectual property by prosecuting dishonest competitors who steal a company’s trade secrets, but it can also be used against a company that finds itself with trade secrets belonging to a competitor.

Congress enacted the Economic Espionage Act in 1996, making it a federal crime to steal trade secrets. 18 U.S.C. 1831 et seq.  The definition of trade secrets in the statute mirrors the broad definition in state trade secret laws to include “all forms and types of financial, business, scientific, technical, economic, or engineering information” that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means, by the public.”  18 U.S.C. 1839(3).  The maximum penalty for violating the statute is 15 years in prison, a $500,000 fine and a maximum corporate fine of $10 million.

United States v. Lange, 312 F.3d 263 (7th Cir. 2002), is a classic example of using the statute to protect a victim company.  There, Replacement Aircraft Parts Co. (RAPCO), a manufacturer of aircraft parts, learned that Matthew R. Lange, a disgruntled former employee, had been offering to sell its secret manufacturing processes to third parties.  RAPCO reported Lange to the FBI, and the FBI arrested him in a “sting operation” in which Lange negotiated with an undercover FBI agent for a data copy of RAPCO’s manufacturing processes.  Lange was convicted and sentenced to 30 months in prison.

The risks posed by hiring competitors’ employees

A company, however, can expose itself to potential criminal liability under the Economic Espionage Act when it hires an employee from a competitor for the purpose of gaining access to its competitor’s trade secrets.  A criminal complaint filed in June charged two former managers of Boeing Co., Kenneth Branch and William Erskine, with stealing more than 25,000 pages of trade secret-protected pricing information belonging to its chief competitor, Lockheed Martin Corp. Erskine, a Boeing engineer in 1996, had recruited Branch, a Lockheed Martin engineer, to leave Lockheed Martin to work for Boeing. Branch was allegedly lured to Boeing with the offer of a higher salary in return for his inside information on Lockheed Martin’s pricing.

Armed with this pricing information, Boeing was able to outbid Lockheed Martin on 19 of 28 Air Force contracts relating to rocket launching vehicles worth approximately $2 billion.  Another Boeing employee reported this conduct to Boeing management, which immediately conducted an internal investigation and discharged both Branch and Erskine.  While Boeing itself has not been criminally prosecuted, the Air Force has canceled approximately $1 billion in rocket contracts with Boeing and has suspended it from performing future rocket contracts.

The RAPCO and Boeing cases highlight three issues for companies to consider in relation to the Economic Espionage Act.  Under what circumstances should a company report the theft of intellectual property to the FBI?  What steps can a company take to make it more likely that a theft will be investigated and prosecuted by the Department of Justice (DOJ)?  What steps can it take to avoid criminal liability when new hires bring their former employers’ trade secrets into the workplace?

When a company finds itself the victim of a trade secrets theft, it has three active options.  First, it can handle the matter itself through a civil lawsuit seeking an injunction under the applicable state trade secret law to have a court enjoin the thief from using or disclosing the trade secrets and ordering the immediate return of the stolen information to the company.  Second, it can report the matter to the FBI for criminal prosecution under the Economic Espionage Act. Or, third, it can do both.  Which option a company should choose depends on the circumstances of the theft and an understanding of the advantages and limitations of each option.

The first option has the obvious advantage of quick action at a time and place to be chosen by the company.  This option also allows the company to maintain total control over the matter.  Conversely, the second option has the disadvantage of ceding total control to the government in the hope that the FBI will investigate the matter immediately and present it to the local U.S. attorney’s office, which will then decide to prosecute.  There is no guarantee that the overworked local FBI and U.S. attorney’s offices will have the time or inclination to prosecute the matter over other pressing matters.  For that reason, the third option of bringing a civil case while simultaneously pressing for criminal prosecution may often result in the U.S. attorney declining prosecution on the theory that the victim has an adequate civil remedy.

The circumstances, however, change dramatically when the thieves are outsiders and the company cannot readily identify them.  For example, in United States v. Hsu, 40 Supp. 2d 623 (E.D. Pa. 1999), an organized ring was prosecuted for attempting to steal a company’s research and development information by secretly bribing a company employee. Private employers are generally not well equipped to prosecute such third-party thieves.  They do not have the ability short of a civil suit to subpoena witnesses and records.  Likewise, they never have the investigative option to wiretap telephones or grant individuals immunity.

Despite the egregiousness of a particular theft, the DOJ will not be interested in prosecuting a case on behalf of a private company unless it can meet the requirement of the Economic Espionage Act that “the owner…[of the trade secrets] has taken reasonable measures to keep such information secret.”  18 U.S.C. 1839(3)(A).  DOJ guidelines make this factor a key consideration in whether to prosecute a case: “[P]rosecutors 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.”  See www.usdoj.gov/criminal/cybercrime/ ipmanual/08ipma.htm#VIII.B.2.

The court’s finding in United States v. Lange, 312 F.3d at 266, that “RAPCO took ‘reasonable measures to keep such information secret’ ” is instructive to understanding this legal standard.  The factors relied upon by the court were:

* The trade secrets in question were physically secured.  “RAPCO stores all of its drawings and manufacturing data in its [computer-assisted drawing] room, which is protected by a special lock, an alarm system, and a motion detector.”  Id.

* Documentation describing the secrets was limited.  “The number of copies of sensitive information is kept to a minimum; surplus copies are shredded.”  Id.

* The number of employees with access to the secrets was limited.  “Some information in the plans is coded, and few people know the key to these codes.”  Id.

* Employees were notified they were working with confidential information and warnings were placed on trade secret information.  “Drawings and other manufacturing information contain warnings of RAPCO’s intellectual-property rights; every employee receives a notice that the information with which he works is confidential.”  Id.

* Vendors were provided with only partial information of the trade secrets.  “[B]y dividing the work among vendors, RAPCO ensures that none can replicate the product.”  Id.

This listing is of course not exhaustive, and other measures such as confidentiality agreements, employee training programs and dissemination of the confidential information on a “need to know” basis are traditionally relied upon by the courts in finding reasonable measures in the civil trade secret context and apply with equal force to the Economic Espionage Act.  These measures must be taken before a theft occurs, however; otherwise a major theft becomes a losing prosecution in the eyes of the DOJ.

Policies to prevent the use of competitors’ trade secrets

While it is important to be proactive to take advantage of the statute, it is equally important to establish company policies and procedures to prevent an employee from infecting the workplace with his former employer’s trade secrets.  The company should impress upon all new employees who are hired from a competitor that they are being hired for their general background, education and expertise and not because they are knowledgeable about confidential information belonging to their former employers. Such a company policy should be memorialized in offer letters, recruiting brochures and new employee training programs as well as the company’s code of ethics.

Special care should be taken to ensure that new employees who come from a competitor will not be placed in a position or given an assignment that could be interpreted as an effort to steal the competitor’s confidential information.  New employees should be specifically instructed that they are not to use or disclose any confidential information from their former employer.  They should also ask the company’s legal counsel or human resources professional-not the businesspeople who could benefit from receiving the information-whether particular information would be considered confidential information belonging to their former employer.

As part of the company’s compliance and training programs, all officers and employees should be sensitized to the problems that can arise from hiring someone from a competitor and the care that must be taken to find the appropriate position for such an employee to prevent the employee from using his former employer’s confidential information.

Finally, employees must be encouraged to report potential violations so they can be investigated and resolved promptly.  There can be little doubt that a major factor in Boeing not being charged was its immediate investigation and subsequent remedial action. Again, advance planning is critical to sound defensive policies to avoid liability under the Economic Espionage Act.