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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Department of Justice Issues Report Highlighting Trade Secret Theft Prosecutions And Need For Companies To Vigilantly Protect Their Data

Posted in Computer Fraud, Computer Fraud and Abuse Act, Data Theft, Espionage, Trade Secrets

By Jessica Mendelson and Robert Milligan

In December 2012, the Department of Justice released a “Summary of the Major U.S. Export Enforcement, Economic Espionage, Trade Secret and Embargo-Related Criminal Cases.”

The report includes the major export enforcement, trade secret theft, economic espionage, and embargo-related criminal prosecutions handled by the United States Department of Justice between January 2007 and December 2012.

The cases resulted from investigations conducted by various governmental agencies, including the Federal Bureau of Investigation (FBI), the Department of Homeland Security’s U.S. Immigration and Customs Enforcement (ICE), the Department of Commerce’s Bureau of Industry and Security (BIS), the Pentagon’s Defense Criminal Investigative Service (DCIS), and other law enforcement agencies. The full report can be found here.

In honor of the new year, here are the major trade secret cases handled by the Department of Justice in 2012:

Chemical Company Trade Secrets to China – In January 2012, a former employee of a large chemical company, was sentenced to five years in prison, two years supervised release, a $25,000 fine and was required to forfeit $600,000. The employee was convicted in the Middle District of Louisiana of conspiracy to commit trade secret theft for stealing trade secrets from his former employer and selling them to companies in China.

Pharmaceutical Company Trade Secrets to United States Subsidiary of a Chinese Company – In January 2012, a former employee of an American pharmaceutical company, pled guilty to stealing trade secrets and making them available to an American subsidiary of a Chinese company. The former employee downloaded and accessed the company’s information from her personal computer in order to steal trade secrets. She pled guilty in the District of New Jersey to theft of trade secrets.

Chemical Company Trade Secrets to China – In March 2012, a former chemical company employee pled guilty in the Northern District of California to “conspiracy to commit economic espionage, admitting that he provided trade secret” to companies controlled by the Chinese government.

Irrigation Company Trade Secrets to Competitors in China – In May 2012, two former employees, as well as their current employers, were charged with theft of trade secrets, wire fraud, and conspiracy to commit wire fraud in connection with the theft of trade secrets. The defendants allegedly stole trade secrets pertaining to sales and prices from their former employer, an irrigation company based in Utah. The defendants allegedly planned to use the information to devise a scheme to undermine the irrigation company’s position in the market.

Telecommunications Trade Secrets to China – In August 2012, a former software engineer was tried for theft of trade secrets in the Northern District of Illinois for allegedly stealing proprietary telecommunications technology from his former employer. Jin’s former employer had spent more than $400 million developing the technology. While on sick leave, the former employee pursued other employment in China, and accessed hundreds of confidential documents from the company’s secure internal network. She was convicted of theft of trade secrets and sentenced to four years in prison, however she was found not guilty of economic espionage for China’s benefit.

Theft of Futures and Options Traders’ Trade Secrets for Potential Use in China – In September 2012, a former senior software engineer for a futures and options trading firm, was convicted of stealing trade secrets in the Northern District of Illinois. The employee allegedly had downloaded more than 10,000 files of source code and other confidential and proprietary information from his former employer while working to improve an electronic trading exchange in China. Allegedly, the employee’s actions resulted in a government loss of over $50 million.

Manufacturing Trade Secrets to China – In September 2012, two former employees were indicted in the Western District of Missouri for attempting to purchase stolen trade secrets. The two allegedly stole trade secrets from their employer, a glass insulation manufacturer, in order to open a competing plant in China. The defendants allegedly offered to pay $100,000 to an FBI cooperating source to obtain trade secret, confidential and proprietary information from the company.

Military Technical Data and Trade Secrets to China – In September 2012, a former senior staff engineer at a space communications company, was “ convicted in the District of New Jersey of exporting sensitive U.S. military technology to China, stealing trade secrets and lying to federal agents.” According to documents filed in the case and evidence presented at trial, in 2010, the employee stole thousands of electronic files from his employer, which included “the performance and design of guidance systems for missiles, rockets, target locators, and unmanned aerial vehicles. Allegedly, the employee planned to use these items for his future employment in China.

Trade Secrets to Kolon Industries—In October 2012, several employees of South Korea-based Kolon Industries Inc. were indicted in the Eastern District of Virginia for allegedly “engaging in a multi-year campaign to steal trade secrets.” The indictment seeks more than $225 million in profits from the theft of trade secrets from Kolon’s competitors. Allegedly, Kolon obtained confidential information related to DuPont’s manufacturing process for Kevlar, a type of fiber used to make various products including body armor and fiberoptic cables. Kolon’s employees allegedly misappropriated confidential information related to Kevlar’s manufacturing process, and within three years, the company was able to replicate the product, and allegedly develop a multi-phase plan to steal additional trade secret information. The FBI investigated the allegations, and the indictment seeks forfeiture of at least $225 million in proceeds from the alleged theft of trade secrets and charges Kolon with “one count of conspiring to convert trade secrets, four counts of theft of trade secrets and one count of obstruction of justice.” A seperate civil case was brought against Kolon in Virginia and DuPont was awarded close to a billion dollars and a 20 year permanent injunction. Please see John Marsh’s excellent summary of the case.

New Legislation—Congress just passed two amendments to the Economic Espionage Act which will protect more trade secrets and enhance the penalties for violations. The legislation directly responds to the Second Circuit’s decision in U.S. v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), which overturned a jury verdict finding the defendant violated 18 U.S.C. 1832(a) of the Economic Espionage Act by stealing computer code from his employer. The court held that the statute did not apply because the computer code failed to satisfy the requirement that the “product” was “produced for” or “placed in” interstate or foreign commerce. The amended Section 1832(a) now applies to 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.”

The House of Representatives recently also passed a bill enhancing the penalties for violations of the Economic Espionage Act. Under the bill, the upper limit of penalties for individual offenses at Section 1831(a) would be increased from $500,000 to $5,000,000; the upper limit for corporate offenses at Section 1831(b) would be increased from $10,000,000 to the greater of $10,000,000 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. The bill also passed in the Senate and is waiting for President Obama’s signature.

The full Department of Justice report shows the increasing importance of criminal prosecution as a tool to dissuade theft of trade secrets. These cases highlight the importance of monitoring employee access to secure company databases and limiting access to important data to a need know basis. Furthermore, companies should consider using additional preventive means to prohibit employees from stealing trade secrets, such as configuring computers to restrict access to external devices, blocking a user from uploading information to a web-based site, and/or utilizing software that blocks employees from sending emails to certain domain names and either highlights or restricts the amount of data that can be sent out by a user. Companies may also wish to consider prohibiting employees from sending emails to certain domain names that are commonly used for personal email accounts and/or block such emails from being sent. In an era in which data is becoming increasingly portable, companies much increase their vigilance in monitoring the use and export of their data and trade secrets.