Spell check features in word processing programs sent correction fluid the way of the buggy whip. Walter Liew and Robert Maegerle, however, saw a $28 million dollar payout to sell the secrets to, among other things, typewriter correction fluid. It is doubtful that they can “white out” the bars of their new prison cells, though.

Liew, a California engineering consultant, and Maegerle, a former engineer, were convicted in what may be the first federal jury conviction under the Economic Espionage Act of 1996 for economic espionage, trade-secret theft, witness tampering, and making false statements.

What could be so incredibly secret and technical about correction fluid?

The white pigment in correction fluid is titanium dioxide. Titanium dioxide is used in hundreds of items, including paints, plastics, paper, rubber, cosmetic products, and food. Titanium dioxide is also used in electrical ceramics and semiconductor devices. The annual global sales of titanium dioxide are approximately $17 billion dollars.

Maegerle’s former employer holds trade secrets on how to make titanium dioxide, and accounts for one-fifth of the annual global sales of the chemical. Liew received the trade secrets from Maegerle and sold them for $28 million to China-based Pangang Group. Allegedly a Chinese state-owned company, Pangang is building a new plant to produce titanium dioxide in China.

The stolen trade secrets included a drawing of a plant system, an internal report about a computer model for a chemical process, a plant flow sheet and a basic data document containing the process and equipment needed to design a titanium dioxide production line.

Each defendant now faces up to 15 years in federal prison and hundreds of thousands of dollars in fines. Pangang was also charged but did not face trial because prosecutors were unable to serve legal documents on the company in China.

Liew’s wife Christina was also charged with economic espionage, trade secret theft and witness tampering. She will be tried separately.

With economic espionage statutes supplementing trade secret law, the government now has additional weapons against trade secret theft. Now, aggressive and determined efforts to steal U.S. intellectual property can be thwarted. Additional deterrents to would-be espionage targets are realized through larger penalties for conviction under both economic espionage and trade secret laws.

Liew and Maegerle understood that the simplicity of the underlying product covered by the trade secret does not detract from the trade secret’s importance to competitors. Although appeals are planned, it is unlikely that the defendants will have access to trade secrets protecting other “simple” devices, such as the locks on their prison doors.

For more information on U.S. v. Liew, 3:11-cr-00573, (N. D. Cal., 2014), see the Bloomberg News article and the FBI press release.

In Part I of this post, we reviewed the Court’s ruling on Nosal’s conviction on the CFAA counts. Here in Part II, we turn to the Court’s ruling on the EEA counts, and the exclusion of evidence regarding Nosal’s non-compete provision.

B.    Nosal’s Conviction on the EEA Counts:

Nosal was convicted of two counts under the EEA for downloading, copying and duplicating his former employer’s trade secrets without authorization, and for receiving and possessing his former employer’s stolen trade secrets. In relevant part, the EEA provides:

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 –

. . .

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters,
destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such
information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated,
obtained, or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1) through (3);

shall, except as provided in subsection (b), be fined under this title or imprisoned not more
than 10 years, or both.

18 U.S.C. § 1832(a).

Nosal raised four arguments for acquittal or a new trial on the EEA counts: (1) instruction that jury could find Nosal guilty of conspiracy to commit the EEA violations even if there was no trade secret was erroneous; (2) there was insufficient evidence that the source lists were trade secrets; (3) there was insufficient evidence that Nosal and his co-conspirators knew or believed that the source lists were trade secrets; and (4) there was insufficient evidence that Nosal and his co-conspirators knew or believed that taking the source lists would cause his former employer economic harm. The Court rejected each of these arguments.

1.     Requirement of Existence of Actual Trade Secret

Nosal argued for acquittal or a new trial on all counts claiming the Court erroneously instructed the jury that it could find him guilty of conspiracy to misappropriate, receive, possess, and transmit trade secrets even if the source lists were not trade secrets as long as he “firmly believed” they were.

The Court rejected this argument based on authority holding that legal impossibility is not a defense to conspiracy charges, including United States v. Hsu, 155 F.3d 189, 193 (3d Cir. 1998). The defendants in Hsu were charged with attempt and conspiracy to steal trade secrets, and sought discovery to prove that the documents they had attempted to obtain were not trade secrets. The Hsu court ruled that the documents were not relevant because legal impossibility is not a defense to either attempt or conspiracy. Id. at 203. The Court further cited the Supreme Court’s recognition that conspiracies are distinct and independent evils punishable by themselves. Salinas v. United States, 522 U.S. 52, 65 (1997).

The Court also found that the legislative history of EEA specifically supported a finding that a “firm belief” satisfied the “knowingly” element. The Court further concluded that any error in the instruction was harmless because the jury found Nosal guilty of the substantive EEA counts, and to do so it had to find that at least one of the source lists was a trade secret. The Court also dismissed several other arguments, including that the conspiracy instruction was a constructive amendment of the indictment because it sought conviction based on the theory that Nosal “firmly believed” the source lists were trade secrets, even if they were not.

2.     Evidence the Source Lists Were Trade Secrets

Nosal also argued for acquittal or a new trial on the EEA counts because there was insufficient evidence the source lists were, in fact, trade secrets, and specifically that the information was not drawn from publicly available sources and that the source lists had not been publicly disclosed.

The Court dismissed this argument citing evidence introduced at trial that would support a finding that the source lists were compilations of both public and non-public information, and that the jury could have inferred based on Nosal’s efforts to retrieve the source lists that the information therein was not entirely public.

The Court also held that the jury could reasonably have found that the trade secret status of the source lists was not destroyed by disclosure to third parties based on evidence that such disclosure was relatively rare and that the alleged trade secrets had not been disclosed to third parties, or had been disclosed only subject to a confidentiality agreement.

Finally, based on a review of the balance of evidence, the Court concluded there was sufficient evidence to conclude his former employer had taken “reasonable” steps to protect the source lists as trade secrets.

3.     Evidence Conspirators Knew Source Lists Were Trade Secrets

Nosal also demanded acquittal or a new trial because there was not sufficient evidence that he and his co-conspirators knew the source lists were trade secrets. The Court disagreed, holding there was sufficient evidence showing both that the co-conspirators were aware that the specific source lists were, in fact, trade secrets, and that the co-conspirators attempted to keep their activities secret, from which the jury could have inferred they knew the information was trade secret.

4.     Evidence Conspirators Knew Taking Source Lists Would Cause Harm

Nosal also argued for acquittal or a new trial because there was insufficient evidence that the co-conspirators intended or knew that their actions would injure his former employer, as is required by the EEA. In reviewing the evidence, the Court concluded there was sufficient evidence from which the jury could conclude that the co-conspirators knew their actions would injure his former employer, including that they were starting a business to compete with his former employer.

C.     Exclusion of Evidence Regarding Non-Compete

Finally, Nosal demanded a new trial on all counts claiming he was prejudiced by not being allowed to argue that a non-compete provision in his independent contractor agreement with his former employer was illegal.

The Court stated that, in ruling on motions in limine, it precluded either party from presenting evidence or argument as to whether the provision was actually legal and enforceable. In rejecting Nosal’s demands, the Court held that there was no convincing argument that this ruling was in error, or that Nosal was so unfairly prejudiced by evidence and argument presented at trial relating to the non-compete as to require a new trial.

In the final part of this post, we will look at what may be next for Nosal, and also look at some lessons employers can learn from this case.

On April 25, 2013, a federal jury convicted Executive Recruiter David Nosal on three counts under the Computer Fraud and Abuse Act (“CFAA”), two counts under the Economic Espionage Act (“EEA”), and one count of conspiracy to violate the CFAA and EEA, for Nosal’s conduct leaving his former employer and establishing a competing business in 2004 and 2005.

The conviction followed an FBI investigation and multiple indictments alleging that Nosal conspired with former co-workers to gain unauthorized access to his former employer’s computers system and to illegally obtain its trade secrets – source lists of candidates compiled for search assignments – to use in his competing business.

On August 7, 2013, U.S. District Judge Edward Chen heard argument on Nosal’s motions for acquittal and a new trial and took both motions under submission. On August 15, 2013, the Court issued its ruling, denying both motions in a 39-page order.

This is Part I of a three part post. In this post we will look at the Court’s order on Nosal’s conviction of the CFAA counts. In Part II, we will review the EEA counts. Finally, in Part III, we will try to foresee what the future may hold for Nosal and look at some lessons employers can learn from this case.

A.     Nosal’s Conviction on the CFAA Counts:

Nosal was convicted of three counts under the CFAA for accessing his former employer’s computers and obtaining information on three separate occasions. In relevant part, the CFAA provides criminal penalties for:

[whoever] knowingly and with intent to defraud, accesses a protected computers without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value, unless the object of the fraud and the thing obtained consists only of the use of the computers and the value of such use is not more than $5,000 in any 1-year period;

18 U.S.C. § 1030(a)(4).

In his motions, Nosal argued broadly that he was entitled to acquittal or a new trial on the CFAA counts because: (1) no person gained unauthorized access to his former employer’s computers within the meaning of the CFAA; (2) the deliberate ignorance jury instruction was confusing; (3) there was insufficient evidence that Nosal had the requisite mental state to commit the CFAA violations; and (4) there was insufficient evidence of a conspiracy.

1.     Unauthorized Access to his former employer’s Computers

In support of the “no unauthorized access” argument, Nosal argued that: (1) under the Ninth Circuit’s en banc decision in this case (United States v. Nosal, 676 F.3d 854 (9th Cir. 2012)), there can be no CFAA violation because any access to his former employer’s computers was gained with the permission of the password holder and there was no circumvention of technological barriers; (2) Nosal’s former co-workers were authorized to access the computers; and (3) Nosal was authorized to receive certain information in the course of his work as an independent contractor for his former employer.

The Court rejected Nosal’s first argument, holding that “[n]owhere does the court’s opinion in Nosal hold that the government is additionally required to allege that a defendant circumvented technological access barriers in bringing charges under § 1030(a)(4)” and also noted that the indictment actually does allege circumvention of a technological barrier because “password protection is one of the most obvious technological access barriers that a business could adopt.”

The Court also dismissed Nosal’s second argument that his former co-workers were authorized to access his former employer’s computer, holding that the evidence established they did not have his former employer’s authorization and “that it is the actions of the employer who maintains the computers system that determine whether or not a person is acting with authorization.” In so doing, the Court distinguished Nosal’s argument that the verdict was criminalizing the allegedly common practice of employees sharing passwords with each other to access their employer’s computers systems by explaining that here, an employee of his former employer impermissibly gave her password, not to a co-worker, but to former employees who were not authorized to access the computers.

The Court also rejected Nosal’s argument that his former co-workers were authorized to access his former employer’s computers on the relevant dates, finding that the evidence sufficiently established that they were not authorized. Finally, the Court rejected Nosal’s argument that he was authorized to receive certain information from his former employer’s computers in his work as an independent contractor, holding he was only authorized to receive limited information relevant to specific work he was doing for his former employer, but that the information he received was for his competing business.

2.     Deliberate Ignorance Jury Instruction

Nosal also argued that an instruction that the jury could find that he had acted “knowingly” to violate the CFAA if he was aware of a high probability that his former executive assistant or former co-workers had gained unauthorized access to the computers or misappropriated trade secrets, and he deliberately avoided learning the truth, was confusing because his former executive assistant was at all relevant times employed by his former employer and was authorized to access the computers while the other former co-workers were not employed by his former employer and were not authorized.

The Court held that Nosal had waived this argument by not raising it earlier. Moreover, the Court held that the instruction was sufficiently clear that the jury could not convict Nosal on the CFAA counts if they concluded his former executive assistant has accessed the computers, because such access would not have been “unauthorized.”

3.     Evidence Nosal had Knowledge of Unauthorized Downloads

Nosal further argued that there was insufficient evidence he had knowledge of downloads from his former employer’s computers were unauthorized because the downloads were not conducted by his former executive assistant. Reciting substantial evidence presented at trial by the government, including evidence that Nosal gave his former co-workers specific directions about information he wanted from his former employer’s computers, that he knew a former co-worker had a large amount of data taken from the computers, that he knew they were not authorized to obtain the information, and that Nosal’s executive assistant did not know how to do so, the Court concluded the government had proved beyond a reasonable doubt that Nosal knew of, was deliberately indifferent to, and/or had conspired to commit the CFAA violations.

4.     Evidence of Conspiracy

Nosal also argued that there was not sufficient evidence of conspiracy. The Court dismissed this argument, concluding that the same evidence that Nosal had knowledge of the downloads from his former employer’s computers was sufficient to support the verdict on the conspiracy count.

In Part II of this post, we will look at Nosal’s conviction on the EEA counts.