Stealing Secrets Solved.

Examining the Economic Espionage Act of 1996

In January 1997, Ted Hong "Victor" Lee attended a meeting at Avery Denison, one of the largest manufacturers of adhesive products in the United States, where he and others learned of a binder containing confidential information on the company's plans for the Far East. Later, closed-circuit television showed Lee gaining access three times to the file drawer where the binder was kept, and wearing gloves once, when he removed it from the office for a few minutes. [1] Confronted by FBI agents in March 1997, Lee admitted that he had provided confidential information to Four Pillars, a company that manufactures and sells pressure-sensitive products [2] in Taiwan, Malaysia, Singapore, the United States, and the People's Republic of China. [3] Avery Denison estimated its lost at over $50 million.

Within U.S. borders, the FBI has assumed the role of understanding and dealing with the problem of stealing secrets. The economy is shifting steadily from one based on tangible goods to one based on information, commonly referred to as intellectual property. The United States produces much of the world's intellectual property and remains the primary target of economic espionage. The most frequently targeted industries include aerospace, biotechnology, computer hardware and software, transportation technology, defense and armaments technology, energy research, basic research, and lasers. [4] Estimates of losses from economic espionage in the United States range from almost $2 billion to $240 billion per year. [5]

Prior to 1996, state and federal laws did not address economic espionage specifically, or in particular, the theft of intellectual property, in any systematic manner. [6] But, federal law enforcement has a new weapon in its arsenal to use against industrial thieves--the Economic Espionage Act of 1996, a comprehensive federal criminal statute that helps law enforcement investigate economic espionage and punish criminals and spies in an unprecedented manner.

BEHIND THE LAW

On May 9, 1996, FBI Director Louis J. Freech testified to Congress that individuals or organizations from 23 different countries were conducting economic espionage activity against the United States. Long-time political and military allies target the United States and, in some cases, take advantage of their considerable legitimate access to U.S. sources to collect sensitive information. Experts have identified foreign nations involved in 21 percent of incidents concerning intellectual property loss where they knew the nationality of the perpetrators. [7] Some countries maintain a military alliance with the United States and use their intelligence services to simultaneously target U.S. technologies. In cases not involving a foreign government or a company, the perpetrator of the theft had a ''trust'' relationship with the company, such as an employee or former employee, retiree, contractor, vendor supplier, consultant, or business partner.

Since the signing of the Constitution, corporations to Congress have sought hard to protect people who create ideas and punish people who steal ideas, regardless of whether they are competitors or spies. Many companies do not have resources to pursue a defendant, and some are confounded by situations involving foreign defendants or those with no assets. In other instances, companies have declined to pursue legal remedies to avoid the discovery process because it would force the disclosure of the sensitive information they sought to protect. History has shown that the security and survival of a nation depends on how well it keeps secrets. [8] The development of trade secrets, also known as proprietary economic information, represents an integral part of economic wellbeing in the United States. Moreover, the nation's economic interests are a part of its national security interests. Thus, threats to the economy jeopardize the nation's vital security interest. Congress remains committed to stopping the often-elu sive adversary, as evidenced by its efforts in this area.

Unlike patents, copyrights, and trademarks, no federal trade secrets statute existed. On October 11, 1996, the President signed the Economic Espionage Act, [9] which gave the U.S. Department of Justice the authority to prosecute cases both domestically and internationally in the area of economic espionage. Thus, the theft of trade secrets became a federal criminal offense. This echoes the civil view that "trade secret protection is an important part of intellectual property that is of growing importance to the competitiveness of American industry. The future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property." [10] Finally, longstanding civil remedies that recognize the value of intellectual property now have a twin in the criminal world.

Previously, most federal criminal enforcement in this area used the Interstate Transportation of Stolen Property Act (ITSP), [11] the mail fraud statute, [12] or the fraud by wire statute. [13] Agencies used mail and wire fraud statutes on a limited basis because they required use of mail or interstate communications. Also, the U.S. Supreme Court essentially negated the use of the ITSP Act in intellectual property cases by holding that "the element of physical goods, wares, or merchandise in sections 2314 and 2315 is critical. The limitation which this places on the reach of the ITSP Act is imposed by the statute itself, and must be observed." [14] With little chance that other courts would rule differently to expand the ITSP Act--a 1930s vintage law--to include intellectual property, Congress enacted the Economic Espionage Act of 1996, which effectively provides a unique and independent means to combat economic espionage.

UNDERSTANDING THE LAW

The Economic Espionage Act creates a new crime of wrongfully copying or otherwise controlling trade secrets, if done with the intent either to benefit a foreign government, instrumentality, or agent, or to disadvantage the rightful owner of the trade secret and for the economic benefit of another person. The law applies to conduct occurring in the United States, and to conduct occurring outside the United States provided that the offender is either a U.S. citizen or resident alien, an organization substantially owned or controlled by a citizen or permanent resident, or an organization incorporated in the United States or that an act in furtherance of the offense was committed in the United States.

As intangible assets, such as intellectual property and trade secrets, became increasingly important to a company's survival, Congress expanded Title 18 with two sections: Section 1831, Economic Espionage, and Section 1832, Theft of Trade Secrets, which together form the Economic Espionage Act of 1996. In an effort to protect corporate equities from spies, as well as criminals, Congress punishes them both under this law.

What Is Economic Espionage?

Economic espionage expands on concepts related to industrial espionage. It includes activity by foreign governments that might use the classic espionage apparatus to spy on a company, and ranges from behavior such as two U.S. companies attempting to uncover each other's bid proposals to the disgruntled former employee who leaves the company with a computer diskette full of engineering schematics. [15]

The Economic Espionage Act prohibits the taking, copying, or receiving of trade secrets without authorization. Section 1831 prohibits anyone from doing so for the "benefit" of any foreign government, foreign instrumentality, or foreign agent. Interestingly, Section 1832 deals with domestic theft and requires an ''economic benefit,'' which recognizes that the foreign entity necessarily might not receive an economic benefit. The Economic Espionage Act is not intended to apply to innocent innovators or to individuals who seek to capitalize on the personal knowledge, skill, or abilities they may have developed. [16] The statute is not intended to prosecute employees who change employers or start their own companies using general knowledge and skills developed while employed. However, Congress purposely criminalized the act of individuals who leave their job and use their knowledge about specific products or processes in order to duplicate them or develop similar goods for themselves or a new employer to compete with their former company.

An earlier version of the statute contained language that exempted "knowledge, experience, training or skill that a person lawfully acquires during their work as an employee" from coverage under the act. Some commentators speculate that by subjecting employees and their subsequent employers to potential criminal liability in this area, the law will hamper the mobility of employees and have a chilling effect on this mobility, in part responsible for the vibrancy of the American economy and substantially conducive to the stability of the nation's democracy. Perhaps in recognition of this, the U.S. Attorney General stated that the Attorney General's Office must review all complaints brought under this act for the 5 years following its enactment in 1996. [17]

What Are Trade Secrets?

Two key concepts used in the Economic Espionage Act involve the requirement that the economic information involved is a secret in the legal sense and that the owner of secret information takes reasonable measures to keep it a secret. [18] Previously, the courts were reluctant to regard intellectual property as tangible goods to have protection under federal criminal law. In the statute, Congress uses terms usually associated with ownership of tangible property. A proprietary secret for purposes of the economic espionage law applies to information not generally known to the public or the business, scientific, or educational community in which the owner might seek to use the information. [19]

What Constitutes Reasonable Measures?

A trade secret requires that the owner of the information must have taken reasonable and active measures to protect the information from becoming known to unauthorized individuals. Thus, if owners fail to attempt to safeguard their proprietary information, no one can be rightfully accused of misappropriating it.

The term reasonable measures is not defined specifically, but a reading of the House Report indicates that, while owners of information must take reasonable steps to keep the information secret, owners do not have to exhaust every conceivable means to keep the information secure. Thus, reasonableness will vary from case to case and depend upon the nature of the information in question.

CONFIDENTIALITY ISSUES

Congress recognized the need to preserve the confidential and valuable nature of trade secrets. Therefore, the Economic Espionage Act contains a provision that authorizes the court to issue orders during legal proceedings consistent with the requirements of the Federal Rules of Criminal and Civil Procedure, the Federal Rules of Evidence, and all other applicable laws. The House Judiciary Committee pointed out that without such a provision, owners may be reluctant to cooperate in prosecutions for fear of further exposing their trade secrets to public view, thus further devaluing or even destroying their worth.

Because courts only recently have begun to test this provision of the statute, it remains too early to tell how it will be implemented in actual practice, but it could prove a serious problem in cases where the secret to be protected is one of the central issues. [20] The criminal defendant has the right to a public trial with all pertinent facts placed before a jury. Should courts prove reluctant to issue protective orders out of concern for the defendant's right to a fair trial, companies might develop reluctance to bring complaints under this statute in fear that their secrets will suffer even broader exposure.

PUNISHMENT

The Economic Espionage Act of 1996 punishes criminals and spies in an unprecedented manner. It authorizes substantial sentences for individual and organizational defendants and can include fines and forfeiture penalties. Individuals may receive fines of up to $500,000 and an imprisonment sentence of up to 15 years for economic espionage benefitting foreign entities and fines of up to $5 million and imprisonment for up to 10 years for the theft of a trade secret. [21] Organizations may receive fines up to $10 million for economic espionage and up to $5 million for the theft of a trade secret. [22] Additionally, a court may require defendants to forfeit any property or proceeds to the United States obtained as the result of the violation of the law as mandated in the Comprehensive Drug Abuse Prevention Control Act of 1970. [23] This statute defines property subject to forfeiture not only as property derived directly or indirectly from the offense, but also "property used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of such violation." [24]

Some individuals argue that, unlike copyrights or patents, trade secrets are not defined clearly and may represent very broad and general business methods or ideas that affect wide parts of a business or entire industry. Large forfeitures could result based on the theft of a single idea. Similarly, the second provision, which allows forfeiture of property used in any manner to facilitate violations, could subject an entire international computer network to forfeiture because one computer was used. Such broad definitions of forfeitable property may have a stifling effect on lawful business behavior because of the risk of consequences from a minor violation. [25]

Additionally, the statute allows the U.S. government to apply for an injunction against a person committing a violation of the Economic Espionage statute. The individual victims and private parties have the traditional injunctive relief available in state courts.

THE ROLE OF LAW ENFORCEMENT

The Economic Espionage Act of 1996 expands the FBI's criminal investigative jurisdiction and enhances its existing counterintelligence responsibilities. At present, the FBI investigates approximately 270 criminal violations and is the lead counterintelligence agency in the United States, responsible for safeguarding the nation against the threat posed by foreign intelligence services. In the counterintelligence world, the FBI thwarts efforts through a variety of means, such as identifying threats, stopping such operations through court-authorized electronic or physical surveillance, and recruiting members of foreign intelligence service as double agents. [26]

State and local law enforcement officials' understanding of the Economic Espionage Act helps because oftentimes they receive the first call from a victim company suffering a loss or theft of intellectual property. An understanding of "the bigger picture" aids initial efforts to collect evidence. For instance, a police officer responding to a trespasser sifting through garbage cans on private property might have the only law enforcement opportunity to uncover a widespread "dumpster diving" effort by a business

competitor or foreign entity to collect intelligence. [27] Trespassers of this nature often have multiple identifications, [28] a vehicle nearby containing more trash collected from other companies, and a time schedule to deliver trash to a central location. Trespassers who claim they recycle for money usually do not know the location of the recycling center. Information, such as names, times, locations, and vehicle description information developed by police officers, detectives, and corporate security personnel remains invaluable for tracking and uncovering schemes to commit economic espionage. [29]

RECOMMENDATIONS

Due to the nature of economic espionage, violations do not occur on a daily basis. Nor do these violations occur typically in plain view like most white collar crimes, such as fraud, money laundering, embezzlement, and advance fee schemes. Law enforcement discovers most economic espionage violations through the use of criminal informants, cooperating witnesses, and victims. Liaison with corporate security personnel also may lead to developing cases in this area.

Federal, state, and local authorities are working together to increase the awareness and threat of economic espionage. Many agencies take a proactive approach, such as the FBI's ANSIR program that focuses on intellectual property by promoting the existence of the Economic Espionage Act, while some departments offer case studies for corporate entities to digest.

On a day-to-day basis, local law enforcement's understanding of this violation advertises the law to the general public and corporations. The increasing popularity of using e-mail and Web sites and conducting business over the Internet results in companies becoming victims repeatedly without ever knowing it. Oftentimes, the corporate world does not consider security until after a company incurs a loss. Education remains one of the keys to success.

CONCLUSION

The days of catching the spy or the criminal sneaking boxes or folders out the door in a briefcase no longer exist. Today, enough information to fill a public library easily fits on a CD-ROM or can go undetected over the Internet in seconds at the push of a button. Law enforcement and security personnel who investigate economic crimes should realize that victims of economic espionage, both individual and corporate, reluctantly may disclose information or work with law enforcement on these matters. Companies answer to shareholders, consumers, and investors and, therefore, often make their decisions not with concern for reporting illegal criminal activity but rather with reference to how disclosure will affect the bottom line and market share. Companies may believe that becoming involved in this sort of criminal prosecution literally could prove counterproductive. Ultimately, they have to protect themselves and often only with the help of law enforcement.

Fortunately, the loss of intellectual property is no longer just a civil matter and, therefore, law enforcement should not treat it as one. The Economic Espionage and Theft of Trade Secrets Act of 1996 provides a powerful and viable tool for law enforcement to protect individuals and corporations, while seriously punishing spies and thieves.

Special Agent Stutler serves in the FBI's Oakland, California, resident agency.

Endnotes

(1.) United States of America v. Pin Yen Yang er al., Criminal No. 97 CR 288 (N.D. Ohio, September 4, 1997).

(2.) For example, pressure-sensitive products include address and mailing labels designed to pass through all types of printers without adversely affecting the adhesive backing of the label.

(3.) Supra note 1.

(4.) Senator Specter, Congress, U.S. Senate, speaking on the Economic Espionage Act of 1996 to the Select Committee on Intelligence of the U.S. Senate and the Subcommittee on Terrorism, Technology, and Government Information of the Committee on the Judiciary of the U.S. Senate. 104th Cong., Session, 2. 12208 (daily ed. October 2, 1996).

(5.) See, e.g., Peter J. G. Toren, "The Prosecution of Trade Secrets Thefts Under Federal Law," 22 Pepperdine Law Review 59, at 62 (1994) ($1.8 billion) and Sam Perry, "Economic Espionage: The Corporate Threat," ($240 billion) available from http://thesouth.com/USInternational/econ.html; accessed September 11, 2000.

(6.) State law did not adequately fill the gaps left by federal law. While the majority of states have some form of civil remedy for the theft of proprietary economic information (trade secrets), either by recognizing a tort for the misappropriation of the information or by enforcing contracts governing the use of the information, these civil remedies often are insufficient. House Report 104-788, 104"' Cong., Session (September 16, 1996).

(7.) Richard J. Heffernan, Dan T. Swarthwood, "Trends in Intellectual Property Loss Survey," American Society of Industrial Security, (Arlington, VA: March 1, 1996).

(8.) Economic Espionage Act of 1996, 104th Cong., 2nd seas., H.R. 104-788 (September 16, 1996).

(9.) 18 U.S.C. 1831 (Economic Espionage) and 18 U.S. C. 1832 (Theft of Trade Secrets).

(10.) Rockwell Graphic Systems, Inc., v. DEV Industries, 925 F.2d 174, 180 (7th Cir. 1991).

(11.) 18 U.S.C. [sections] 2314.

(12.) 18 U.S.C. [sections] 1341.

(13.) 18 U.S.C. [sections] 1343.

(14.) United States vs. Brown, 925 F.2d 1301 (106th Cir. 1991).

(15.) Supra note 8.

(16.) Supra note 8.

(17.) 21 U.S.C. [sections] 853.

(18.) 18 U.S.C. [sections] 1839. The term owner, with respect to a trade secret, means the person or entity in whom or in which rightful legal or equitable title to or license in the trade secret is reposed.

(19.) Supra note 8.

(20.) See U.SS. v. Kat-Lo Hsu, 982 F. Supp 1022 (ED. Pa. 1997) 20, cited as example.

(21.) 21 U.S.C. [sections] 1831 and [sections] 1832.

(22.) Ibid.

(23.) 21 U.S.C. [sections] 853.

(24.) 21 U.S.C. [sections] 853(a)(2).

(25.) Leslie G. Berkowitz, "The Economic Espionage Act of 1996: An Experiment in Unintended Consequences?" 26 Colorado Lawyer 12 (December 1997).

(26.) Speech by Howard M. Shapiro, former General Counsel, FBI, at a Cornell Law School forum sponsored by the Criminal Justice Society, October 18, 1994.

(27.) Dumpster diving is the act of going through someone's trash to get information about them. As a general rule, trash on the curb has no expectation of privacy while trash on private property does.

(28.) More than five false identifications may be a violation of federal law under the Fraud and Related Activity to Identification Documents (FRAID) Act, 18 U.S.C. [sections] 1028.

(29.) The FBI uses the Awareness of National Security Issues and Response (ANSIR) program to communicate with industry, provide advisories and alerts on topics such as economic espionage, and present unclassified briefings to corporate security personnel nationwide. For more information or to make a referral, contact the FBI ANSIR coordinator at the local FBI field office, or access www.fbi.gov.