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THE ECONOMIC ESPIONAGE ACT: A VERY MIXED BLESSING Trade secrets are the most valuable intellectual property a client can have. Many companies have trade secrets, since they are created in the course of nearly every kind of business. Trade secrets can encompass many kinds of information, including technical information: the design of a machine or process, drawings, calculations, the results of testing or experimentation, part tolerances, factory layouts, computer programs and even collections of data that are individually publicly available as just a few examples. Trade secrets can also encompass business information: financial and strategic plans, customer data, proposals, cost information, pricing policies and techniques, qualification procedures for vendors and suppliers, and much more. But, trade secrets are completely unique, since unlike all other forms of intellectual property, they require no disclosure to any public agency for review and approval. The statutory scheme for the protection of trade secrets is powerful. The elements required for qualification as a trade secret are simple: information that is not generally known and therefore has value, and which is protected by reasonable measures. No written employment agreements are required. The level of secrecy is relative, not absolute. The measures taken to protect trade secrets need not be perfect, only "reasonable." Since this is not a criminal statute, the burden of proof is much lower. The available remedies are equally powerful: injunctions including even affirmative acts; and damages, including actual loss and unjust enrichment to the extent not taken into account in computing actual losses. There is punishment, too. Damages can be doubled, and attorneys' fees may be available. This is one tough statute, and there is even more. In many cases, expedited discovery can be obtained, along with orders to preserve evidence of trade secret misappropriation from destruction. But you must act quickly. For your own protection, you must act as if the limitations period for trade secret misappropriation is ninety days -- no matter what the statute itself says. Speed, speed, speed upon discovery of trade secret misappropriation is critical. Procrastinating because you or your client believes that the defendant will never succeed in his new business, or because you fear being portrayed as a bully, is foolhardy. Pursuing relief in a more methodical way, as is done in a normal lawsuit -- with all of its attendant delays and prolonged procedure -- simply gives the misappropriator time to convert the trade secrets into another form, destroy the original documents and evidence of misappropriation, and completely cover his or her tracks. In one of our cases, a client learned from a former employee that a competing company had possession of a book of drawings reflecting the dimensions and permitted dimensional variations (called tolerances) associated with every component of a very high-pressure fluid-handling system. In addition, we learned that the rival was incorporating these drawings into its own computer system and then destroying the original drawings page by page. We found evidence of a copyright violation, too. With this combined information, we filed a civil suit under the Uniform Trade Secrets Act in federal court. We then sought -- and got -- from the court a temporary restraining order, an order for expedited discovery including depositions and document production, and an order allowing us to assist a United States Marshal in searching the premises of the competitor for evidence of the violations. The time from the commencement of our investigation to the search of the defendants' premises was one week, from start to finish. Our search was spectacularly successful, and we recovered evidence with our client's name on it that was being destroyed, and which would have been gone had even a few more days been allowed to elapse. We were able to depose the defendant's key employees within a few days, freezing them into incredible and inconsistent explanations of their conduct and knowledge. The above example shows how to get extremely speedy and comprehensive relief through the traditional means -- i.e., under the Uniform Trade Secret Act. Now, however, we have a new tool, an exclusively federal route to protection of trade secrets: the Economic Espionage Act of 1996, 18 U.S.C. Section 1831-39. Instead of filing a civil action* in state court (or in federal court if diversity is satisfied or there is another jurisdictional basis), injured parties can now go to federal law enforcement agencies and United States Attorneys for relief. Which is the better way for your client to protect its intellectual property? As a former Assistant U.S. Attorney who is also an intellectual property litigation attorney, I believe I have a unique perspective on this new statute, which I would like to share with you. First, initial reports about the Economic Espionage Act are inflated. For instance, Fortune magazine asserted in a recent issue that the EEA is "a bear trap you don't want clamped around your leg." As an example, this article describes a competitor who overheard two nearby passengers who loudly blabbed their sales presentation on an airplane trip, and asserts that the person overhearing would be prosecutable under the EEA. The same article goes on to suggest that we must be baby-sitters: Are we saying you're obligated, now, to protect competitors from their own stupidity? Yes. Nonsense. The EEA requires the same reasonable measures to protect trade secrets as do the state statutes governing trade secret misappropriation. Section 1839 of the EEA defines a trade secret in the traditional manner: (3) the term "trade secret" means all forms and types of . . . information . . . if -- (4) the owner thereof has taken reasonable measures to keep
such information secret; . . . . Shooting your mouth off on an
airplane is not a reasonable protective measure, at least in
the context of a criminal prosecution, which requires proof of
guilt beyond a reasonable doubt. To premise a criminal prosecution,
with the crushing penalties of the EEA, upon the failure of a
bystander to yell "Shut Up!" in an even louder voice
is not a case that would appeal to any busy federal prosecutor.
In fact, it would be doubtful that the burden even in a civil
suit* could be sustained. An often-cited
decision of the Fifth Circuit, E.I. duPont de Nemours & Co.
v. Christopher, 431 F.2d 1012 (5th Cir. 1970), held that snooping
by flying near enough to a competitor's incomplete plant to photograph
its machinery and layout was a misappropriation. But that is
not passive listening while sardined into a modern airline seat,
and Christopher was a civil, not a criminal, action. The very high intent requirements and the narrow definition
of a trade secret make it clear that we are talking about extraordinary
theft, not mere competition. With the help of Senator Hatch and Representatives McCollum and Schumer, we have carefully drafted these measures to ensure that they can only be used in flagrant and egregious cases of information theft. Yet another of Fortune's examples is not likely to satisfy prosecutors who are employing this new statute and dealing with a much higher burden of proof. In this one -- which again takes place on an airplane -- a person reads a report marked "confidential," but has been dropped or lost by another passenger. Again, the suggestion of carelessness, without any evidence of any preplanned activity on the part of the reader of the confidential report, would be a high barrier to a successful criminal prosecution. Only Fortune's third example, the recruitment and placement of a competitor's wife as a spy in a rival's business, would be a potential case for criminal prosecution. And even this example might have been made stronger for purposes of illustration by making the spy a foreign agent, rather than a rival's spouse. There are many practical barriers to the assertion of this new federal statute. Many have to do with the priorities of the FBI and the Department of Justice that can vary from city to city. Some of these barriers are necessary and stem from sound policies that must be followed; others are merely expedient. In Chicago, where I live, gang prosecutions have become a high priority. Prosecutions involving narcotics and other controlled substances are also important, and consume a large proportion of the resources of any United States Attorney. Chicago is famous too for the many prosecutions of public officials, including a former governor, state representatives, many judges in the Circuit Court of Cook County, law enforcement officers, aldermen, and many others whom the late columnist Mike Royko skewered. Another barrier is the number of cases of all kinds confronting federal prosecutors and investigative agencies. As an Assistant United States Attorney, I was keenly aware of this burden. The majority of cases were the subject of a "declination memo," meaning that the case -- even if criminal conduct was evident -- would not be prosecuted for any of a number of reasons: e.g., the strength of the evidence, the age of the case, the number of violations, and whether the crime had been addressed in some other way. There simply were not enough agents and prosecutors to investigate and prosecute every crime. There never have been and there never will be, unless we are willing to establish a police state for ourselves. The FBI's home page shows that "Operation Counter Copy," dealing with investigations into crimes related to intellectual property, show no participating FBI Field Offices in Los Angeles, Denver, Houston, New Orleans, Chicago, Atlanta, Miami, or New York. That is not to say that such an investigation wouldn't be pursued in one of these cities, but it cannot be taken as a positive sign, either. A look at the FBI's home page indicates the breadth and depth of the Bureau's required activities. The EEA is only one of many responsibilities. The United States Attorneys' Manual describes the written criteria that are supposed to be considered in bringing any charges under the EEA. It says: The EEA is not intended to criminalize every theft of trade secrets for which civil remedies may exist under state law. It was passed in recognition of the increasing importance of the value of intellectual property in general, and trade secrets in particular to the economic wellbeing and security of the United States and to close a federal enforcement gap in this important area of law. Appropriate discretionary factors to be considered in deciding whether to initiate a prosecution under Section 1831 or Section 1832 include: (a) the scope of the criminal activity, including evidence of involvement by a foreign government, foreign agent or foreign instrumentality; (b) the degree of economic injury to the trade secret owner; (c) the type of trade secret misappropriated; (d) the effectiveness of available civil remedies; and (e) the potential deterrent value of the prosecution. The 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. The universal application of this factor would thus defeat the Congressional intent in passing the Economic Espionage Act. The policy is blunt: not "every theft" will be prosecuted under the EEA. Some number of crimes are therefore going to go unpunished. The prosecutor's discretion is clear. Attorney General Reno promised Congress that every prosecution under the EEA for the first five years would require approval by the Department of Justice, and sanctions in the event approval was not obtained. These are the written criteria, too; the unwritten criteria are often of more weight. While one guideline indicates that the availability of a civil remedy should not be dispositive, it can only be a powerful factor to a prosecutor faced with serious crimes that have no civil remedy. As a prosecutor, I sometimes had cases presented to me where a civil suit, perhaps for fraud or a RICO violation, had already been filed. Gangs and drug dealers, however, are not the objects of civil suits. Corrupt politicians cannot be removed from office except by exhaustive grand jury investigations and indictments. So if it is a choice between a crime that disrupts the community and would go unpunished without action by a federal prosecutor, and a crime that will be redressed by damages and an injunction in a civil suit, prosecutors will opt for the former. It is the appropriate choice. Other barriers are accidents. For example, investigations by the Secret Service drop noticeably in presidential election years, since protection duty takes precedence over investigations of federal crimes normally conducted by the Secret Service. Unexpected events, such as the FBI's lengthy involvement in the TWA Flight 800 crash investigation, can consume so much of an investigative agency's resources that numerous other meritorious investigations are ignored. Other barriers are merely expedient, but nevertheless real. Many prosecutors and law enforcement agencies have one eye on their press coverage. This has long been true of the FBI, in particular, ever since the days of J. Edgar Hoover. While head prosecutors for the federal government are appointed rather than elected, many of them plan to seek elective office later on, and so they must pay attention to how the community perceives their law enforcement efforts, particularly in these days of high sensitivity to violent crime and its effects. It is not really clear that the FBI ever wanted the Economic Espionage Act to prosecute domestic crime that had no international component. FBI Director Louis Freeh, in a statement before Congress in May 1996, repeatedly stressed the activities of foreign governments as a basis for enactment. Director Freeh also characterized the crime of most interest: the planting of a foreign agent inside a company. His view, therefore, seems consistent with that of Congress, which chiefly stressed the damage resulting from foreign economic espionage. (Note that even with Fortune's third scenario, which was the only example cited in the article that stood a chance of criminal prosecution, the spy was not a foreign agent.) Cases brought thus far under the Economic Espionage Act appear consistent with the notion that egregious criminal activity will be required to justify a prosecution, and that foreign involvement enhances the chances of prosecution. All cases brought thus far comprise incidents of outright bribery and payments for tangible property. Some include traditional charges of mail or wire fraud, and at least one trade secret case brought in Cleveland -- the Avery Dennison case -- included such charges. In two cases, employees of Taiwanese companies were caught in FBI sting operations, paying outright bribes to the agent posing as an employee of the victim American company. One must wonder whether such cases will be brought when they involve agents of the Chinese government or another government of a powerful ally or enemy with sensitive relations with the U.S., and where our State Department decides a criminal case might negatively impact upon foreign policy. Taiwan is easy to push around. There is no point in going to the federal prosecutor if your case does not fit the pattern. Three factors in pursuing federal relief under the EEA are: (1) whether the case involves a foreign agency of some kind, (2) whether a bribe is paid to obtain control of tangible property embodying the trade secrets, and (3) whether the case includes traditional charges of mail or wire fraud, which are everyday tools of federal prosecutors. Involvement of foreign governments or agents, and of conduct that can be charged as traditional wire and mail fraud are two factors that enhance the chances of a federal prosecution. Bribes increase the sex appeal, and are concrete evidence of the defendant's knowledge of their wrongdoing. The great majority of trade secret cases, however, lack these elements. As a rule, they are therefore not candidates for federal prosecution. There are significant disadvantages to federal prosecution, too. One is the much higher burden of proof. In a civil trade secret misappropriation suit pursued by your client, the burden of proof will be by a preponderance of the evidence -- that is, the facts alleged by the plaintiff are more likely to be true than not. (The shorthand is "51% is enough.") A criminal case, however, requires proof beyond a reasonable doubt. The hurdle is much higher, and the chances of success in prosecuting the average trade secret misappropriation as a crime are correspondingly reduced. Suppose that no civil suit is filed, and the federal prosecutor agrees to investigate. A federal investigation means that the government, not you and your client, will be taking discovery. Grand jury investigations can last from a few weeks to one or two years; meanwhile, your trade secrets are being used, converted, and disseminated. Do you want to countenance the delay, and allow a federal attorney inexperienced in trade secrets to question all the witnesses -- yours as well as the defendant's? In your own civil case, and particularly where expedited discovery is taken, you and your client can decide whom to depose, what documents to use, and what questions to ask. However, in a federal investigation, all of that will be done by the prosecutor in the grand jury and at trial. In many cases where grand juries are convened, the prospective defendants choose to say nothing based upon their fifth amendment rights. In a civil suit, however, this rarely occurs, and witnesses can be nailed down under oath to a story that won't survive the light of day, as happened in our firm's case, which I cited earlier. Nor can your client use the existence of the federal criminal investigation as a means of persuading the defendants to come to any agreement. In all the jurisdictions I am aware of, it is unethical for an attorney to use the threat of criminal charges to gain an advantage in civil proceedings. Another shortcoming of federal prosecution is that the protection of your trade secrets must be largely delegated to the federal prosecutor, and to the demands of the criminal justice system. One prominent policy of the rules governing that system is the protection of the rights afforded to one accused of a crime. Property comes second. In a civil suit, protective orders that limit exposure of protected information are common; provision may be made to keep the defendant from seeing certain information designated under the order, making it available only to the defendant's counsel. In a criminal case, however, the ante is upped: the defendant is looking at loss of liberty, as well as a forfeiture of property. Section 1835 of the EEA provides for protective orders. It therefore remains to be seen whether courts will be willing to limit defendants from seeing evidence that may bear upon their innocence or guilt. The prosecutor also has an independent obligation to provide any exculpatory evidence to the defendant under long-standing Supreme Court decisions. And courts are going to be even more sensitive to the need for an open courtroom where a person is on trial for committing a crime. Whom do you want to see your trade secrets today? Remember the attorney-client privilege, which prevents communications made in confidence between a client and his or her attorney from being revealed? It won't apply to anything you say to a federal prosecutor. Nor will your work-product immunity. If your client wants to seek federal charges, everything you or your client says to a federal agent or a federal prosecutor will be discoverable in any later civil suit, should you try to bring one because, for example, the federal investigation takes too long or closes down without any indictment being returned. The long letter you wrote to the prosecutor explaining the nature of your client's trade secrets, your theories about how your client was harmed, the ways in which the trade secrets were -- or were not -- well protected, will all come out. And some prosecutors are notorious for press leaks, too. Under the EEA, there are no damages, only penalties. Sorry, guys; those go to the Treasury. Under the Uniform Trade Secrets Act, however, the damages go to the damaged party: your client. And, if you are planning to file a civil suit after the criminal case is over, why wait? Several important considerations mitigate against pursuing federal relief: the likelihood that few cases presented to a prosecutor will actually be prosecuted due to law enforcement policies, the statutory history, and local priorities; the delay attendant to many investigations; the risk to the victim's trade secrets posed by the higher constitutional protections inherent in a criminal proceeding; the delegation of the choice of evidence, and of decisions about how best to preserve that evidence, to an attorney who may not be skilled in trade secret law; and the lack of recovery of damages. So when should you choose to seek the help of the FBI or the U.S. Attorney in prosecuting your client's trade secret misappropriation case as a crime? One obvious answer is when your case appears to fit within their guidelines: foreign involvement, the payment of bribes, the existence of physical misappropriated evidence, the facts of the case are a "slam dunk," the likely ineffectiveness of civil remedies (for instance, when the perpetrator is a foreign government or a foreign corporation with no U.S. offices), where the FBI can run a sting, or where your resources are limited. Even though all these factors may be present in your case, remember that you will still be putting all your eggs in one basket, and the opportunity for a speedy resolution through a civil suit may be fading. If you decide to seek federal help, when should you file your own civil suit, or should you file one at all? There are three choices: before going to the FBI, while it is investigating, or after any federal investigation (and hopefully a successful trial or plea of guilty) is over. Presumably you went to the federal government for help because you believed the popular publicity about the EEA and wanted to avoid spending the resources necessary on a civil suit under the Uniform Trade Secrets Act. Thus, there is a powerful disincentive to file any private action. That leaves out filing before seeking the aid of law enforcement authorities. As to during an investigation, the FBI and the U.S. Attorney are probably going to react adversely. Filing your own suit may upset or tip off their investigation, or cause important evidence to be revealed prematurely. It also sounds like a vote of "no confidence." I recommend against it unless it is clear that the federal investigation is likely to go nowhere. The third choice is to wait until the feds are done. You may get an easy win, but it usually isn't easy to collect damages from people behind bars, nor is it easy to get discovery from them. Of course, if the defendants are acquitted, you can still proceed with your lower burden of proof a la O. J. Simpson, but there may be nothing left to collect. The defendants will have had time to spend it, lose it, or hide it. My point is this: using the EEA as a substitute for a civil trade secret misappropriation case is an all-or-nothing proposition. No matter what, the Economic Espionage
Act is going to be selectively applied, at least for some
time to come. But remember: it will not and cannot replace actions
under the Uniform Trade Secrets Act
for the great majority of trade secret disputes. *The Uniform Trade Secrets Act (UTSA) is a civil statute. |
