The Penalties for Stealing Trade Secrets Just Became Worse

14 January 2013 Labor & Employment Law Perspectives Blog

When the U.S. Congress enacted it in 1996, the Economic Espionage Act (EAA) made the theft, transmission, or receipt of trade secrets a federal crime. Two recent amendments to the law add new teeth to the law and suggest that employers might be wise to revisit their trade secret policies, protection mechanisms, and training programs in response. Under Section 1831 of the EAA, a conviction requires that the individual intend or know that the offense would “benefit any foreign government, foreign instrumentality, or foreign agent.” Under the original version of the law, the maximum penalties for a violation of that section were fines of up to $500,000 and imprisonment for up to 15 years for individuals, and for corporations fines of up to $10 million. Conversely, for a conviction under Section 1832, there is no need for this foreign element, but rather simply that the individual intend to benefit “anyone other than the owner thereof,” while also “intending and knowing that the offense will … injure the owner of that trade secret.” Originally, a Section 1832 conviction also required the trade secret to be “related to or included in a product that is produced for or placed in interstate or foreign commerce.”

Two recent amendments to the EAA change these standards. The first, called the Theft of Trade Secrets Clarification Act of 2012 which the president has just signed into law, clarifies that the EEA does not only apply to products a company sells, but it applies to both products and services without regard to whether or not they are sold into commerce or only used internally. The law comes directly in response to a recent Second Circuit decision, United States v. Aleynikov, which concluded that the EEA did not cover source code used by an employer to analyze financial information that was stolen by a former employee because the code was not a product produced for or placed in interstate or foreign commerce.

The second, known as the Foreign and Economic Espionage Penalty Enhancement Act of 2012, which is awaiting the president’s signature, increases the maximum penalties for misappropriating trade secrets to benefit a foreign government. For individuals, the maximum fine will increase from $500,000 to $5 million, and for corporations from, $10 million to either $10 million or three times the value to the organization of the stolen trade secret.

As changes in the law often do, these amendments suggest it is an opportune time for companies and employers to revisit their trade secret compliance protection measures and training. The EEA and its imposition of criminal liability now tracks common law trade secret law in the sense that a trade secret need not be confined to products sold in foreign or interstate commerce. Rather, trade secrets can encompass a variety of types of information used solely in the services industry, such as a hedge fund’s source code for valuing stocks. Companies, regardless of their industry, may want to ensure that they and their employees have a solid understanding of what can constitute trade secrets, and may also want to review their methods for compiling information to ensure they are not misappropriating trade secrets so as to be exposed to potential criminal liability. These suggestions are particularly noteworthy, not only because of the enhanced penalty statute, but also because the U.S. government is looking more closely than ever at foreign economic espionage and other international business practices, such as those potentially violating the Foreign Corrupt Practices Act.

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