Criminal Theft of Trade Secrets

Trade secrets are one of the four major types of intellectual property and have many unique features, a number of which we have covered in other blogs. Unlike patents, which can only be enforced by private parties in civil court, trade secret misappropriation can lead to criminal liability. This blog discusses the basic concepts surrounding the criminal theft of trade secrets.

Trade Secrets and the Economic Espionage Act of 1996

Criminal trade secret theft is defined in the Economic Espionage Act of 1996 (the "EEA"), 18 U.S.C. §§ 1831–37. See DOJML USAM 9-59.100. Section 1832 defines the crime as follows:

(a) Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use 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–
(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;
(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information; [or]
(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization. . . .

Thus, a "defendant violates federal law when he '€˜steals' . . . a trade secret, '€˜intending or knowing that the offense will . . . injure any owner of that trade secret.'" United States v. Howley, 707 F.3d 575, 579 (6th Cir. 2013). So in addition to the mental state requirement, the government must prove the existence of a trade secret—€“often a challenging task. United States v. Asgari, No. 1:16-CR-124, 2018 WL 1151562 (N.D. Ohio Mar. 5, 2018) (considering whether a process could be considered a trade secret even though parts of the process were disclosed in patents).

Section 1831 creates criminal liability for:

Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly–
(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;
(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret; [or]
(3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization . . . .

Courts have explained that Section 1832 is "a general criminal trade secrets provision requiring that the benefit be economic." United States v. Liew, 856 F.3d 585, 597 (9th Cir. 2017) (internal quotations omitted). Section 1831, by contrast, "is designed to apply only when there is evidence of foreign government sponsored or coordinated intelligence activity and may involve any manner of benefit." Id. A criminal defendant can also be liable for attempt, conspiracy, and aiding and abetting. 18 U.S.C. § 1832(a)(4)–(5); 18 U.S.C. § 1831(a)(4)–€“(5); United States v. Lam, No. CR 18-00527 WHA, 2019 WL 6913141, at *1 (N.D. Cal. Dec. 19, 2019). As with other crimes, the government's burden of proof "beyond a reasonable doubt" applies. United States v. Howley, 707 F.3d 575, 579 (6th Cir. 2013). Both organizations and individuals can be held criminally liable. See e.g. 18 U.S.C. § 1831(b); 18 U.S.C. § 1832(b).

The Department of Justice Manual explains that "the legislative history of the EEA suggests that traditional defenses available in a civil action for theft of trade secrets are equally applicable to a criminal violation." § 1136. DEFENSES, DOJML RESOURCE MANUAL TI 9 NO 1136. The manual notes two specific defenses: parallel development and reverse engineering. Regarding parallel development, the Manual explains that "[o]ther companies and individuals have the right to discover the elements of a trade secret through their own research and hard work." Id. The Manual further explains that it is not criminal to reverse engineer a trade secret, which it defines as "the practice of taking something apart to determine how it was made or manufactured." Id.; see also our prior blog on reverse engineering.

The punishment for the criminal theft of trade secrets can involve fines and jail time. Section 1832 explains that an individual held liable may be "fined [$250,000 or not more than the greater of twice the gross gain or twice the gross loss[i]] or imprisoned not more than 10 years, or both," while Section 1831 explains that a violation can result in an individual being "fined not more than $5,000,000 or imprisoned not more than 15 years, or both." Section 1832 provides that an "organization that commits" trade secret theft "shall be fined not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided." Section 1831 defines similar organizational liability but increases the $5,000,000 fine to $10,000,000. A criminal trade secret defendant may also have to pay large restitution payments to the victim.[ii]

Regarding the potential overlap between civil and criminal liability for trade secret theft, the Department of Justice's Manual explains that the EEA "is not intended to criminalize every theft of trade secrets for which civil remedies may exist under state law." DOJML USAM 9-59.100. Instead, "[i]t was passed in recognition of the increasing importance of the value of intellectual property in general, and trade secrets in particular to the economic well-being and security of the United States and to close a federal enforcement gap in this important area of law." Id. With that preface, the Manual explains there are several "discretionary factors to be considered in deciding whether to initiate a prosecution under § 1831 or § 1832." Id. These include:

• the scope of the criminal activity, including evidence of involvement by a foreign government, foreign agent or foreign instrumentality;
• the degree of economic injury to the trade secret owner;
• the type of trade secret misappropriated;
• the effectiveness of available civil remedies; and
• the potential deterrent value of the prosecution.

The Manual also cautions that "[t]he availability of a civil remedy should not be the only factor considered in evaluating the merits of a referral because the victim of a trade secret theft almost always has recourse to a civil action." Id.

Examples of Trade Secret Theft

Several situations commonly give rise to criminal trade secret prosecutions. A typical scenario is one in which an employee of a company steals the company's trade secrets for personal gain. In one case, an employee "download[ed] thousands of files from [his employer's] system, including ones that contained trade secrets."[iii] The employee then used the information to launch a competitor company.

Criminal trade secret liability may also be imposed when one company or its employees steal trade secrets from another company. In United States v. Howley, the victim company hired another company to repair some machines. 707 F.3d 575, 578 (6th Cir. 2013). "Instead of sending a technician, [the company] sent . . . senior engineers . . . ." When the engineers were left alone for a few minutes at the facility, they took photos of information that included trade secrets.[iv]

In addition to Sections 1831 and 1832, trade secret theft can implicate other crimes. For example, prosecutions for criminal trade secret theft can also include counts of violating the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (generally applying to unauthorized use of a computer, or "hacking"), or for committing wire fraud. Other crimes such as money laundering and visa fraud may also be included.

In summary, stealing another's trade secret can lead to criminal liability in addition to civil liability. Criminal trade secret theft carries serious penalties, including steep fines and the possibility of spending years in prison. Both individuals and organizations can be held liable, and common trade secret theft situations include theft by employees, third parties, or competitors. Trade secret theft may also implicate other crimes, such as computer hacking and wire fraud.

More questions? Contact the authors or visit Fish's Intellectual Property Law Essentials.

[i] Fines under Section 1832 are provided in 18 U.S.C. § 3571.

[ii] See https://www.fbi.gov/news/stories/two-guilty-in-theft-of-trade-secrets-from-ge-072920 ($1.4 million).

[iii] See https://www.fbi.gov/news/stories/two-guilty-in-theft-of-trade-secrets-from-ge-072920.

[iv] See also https://www.justice.gov/usao-sdtx/pr/chinese-energy-company-us-oil-gas-affiliate-and-chinese-national-indicted-theft-trade.