Congress Extends Economic Espionage Protections

President Barak Obama is about to sign a new amendment to the Economic Espionage Act which extends trade secret protection for proprietary information which is not directly used by the owner in commerce. Congress drafted this amendment as a response to a recent Second Circuit case which ruffled some legislative feathers.

In United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), the defendant was a Goldman Sachs employee who allegedly took off with the company’s high frequency trading system algorithms and implemented them on his new employer’s systems. The court pointed out in its opinion that Mr. Aleynikov had been the highest paid programmer in his group, earning a yearly salary of $400,000 (not counting the generous bonuses Goldman Sachs is known to hand out). Aleynikov joined his new employer at a yearly salary of $1 million and was expected to develop a trading system, with functionality similar to that of Goldman’s, within 6 months of his employment – a task that normally would  take years to complete. At his last day at Goldman, minutes after his going away party, Aleynikov apparently uploaded 500,000 lines of code to his new employer’s servers. Later Mr. Aleynikov was arrested in fitting style by the FBI at the Newark Liberty Int’l Airport, carrying a potion of the incriminating  code with him.

Mr. Aleynikov was prosecuted under the National Stolen Property Act, 18 U.S.C. § 2314 and the Economic Espionage Act, 18 U.S.C. §1832 in the United States District Court for the Southern District of New York. The case was tried before a jury which found for the prosecution and  Aleynikov was sentenced to 8 years of  imprisonment, one of the toughest sentences ever imposed under the EEA.

On appeal, the Second Circuit concluded that the defendant’s actions did not violate either statute and vacated the conviction. The issue under the NSPA was whether the defendant stole “tangible goods” as defined in the statute; under the EEA, the issue was whether the code was a product “produced for or placed in the interstate or foreign commerce.”

On the first issue, the court held that the statute does not apply to intangible goods, which effectively meant that it may not be used for prosecuting stolen source code offenses. According to the court, if Aleynikov had seized the code as it was embodied in a Goldman-owned CD or flash drive, that act would be covered by the statute. The court spun an even thinner web when it reasoned that the interstate transportation of the code on a memory drive was again not transportation of stolen goods because the affixing of the intangible property to Aleynikov’s drive did not transform it from an intangible stolen property into a tangible one.  Ironically, Aleynikov’s arbitrary decision to upload the code electronically to a remote server, rather than copy it to a memory drive, would save him from serving half a dozen years in prison.

In discussing Aleynikov’s actions under the EEA, the court concluded that this statute did not apply either, because Goldman had not placed this particular code in “interstate or foreign commerce,” but rather was using it for its internal operations. Again ironically, the same feature that defeated the government’s case under the EEA, the fact that the code was not offered for sale or licensing, would be essential in establishing it as a trade secret because it is a measure for shielding it from prying eyes.

Possibly disconcerted by the curious result in this case, Congress has now approved an amendment to the EEA which affirmatively protects in-house, intangible trade secrets. The bill is drafted to “clarify the scope of the Economic Espionage Act of 1996″ and it expands the statute to include goods as well as services, which covers intangible property such as source code. The amendment also adds the phrase “a product or service used in or intended for use in … interstate or foreign commerce,” which disposes of the requirement that the trade secret be offered for sale or licensing in interstate commerce. Based on this, it would suffice that the trade secret be used in interstate or foreign commerce. These two changes service as direct “fixes” to the Aleynikov decision – now it remains for them to be tested in Federal court before financial services employers may safely exhale.