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Client Alerts

The New Theft of Trade Secrets Clarification Act

February 13, 2013

Client Alerts

The New Theft of Trade Secrets Clarification Act

February 13, 2013

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Theft of Trade Secrets | Clarification Act
The New Theft of Trade Secrets Clarification Act On December 28, 2012, President Obama signed the Theft of Trade Secrets Clarification Act. S. 3642 (112th). The Clarification Act is a direct response to the Second Circuit’s decision in U.S. v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). (See details below.) In Aleynikov, the Second Circuit overturned a criminal conviction under the Economic Espionage Act 18 U.S.C. § 1831, et seq., after the court determined that the stolen source code was only used internally for a high-frequency trading system and was not “related to or included in a product that is produced for or placed in interstate or foreign commerce.” The Clarification Act expands Section 1832(a) to cover internal trade secrets “related to a product or service used in or intended for use in” commerce. In addition to the source code at issue in Aleynikov, this expansion could include internal processes of doing business or gathering information that may not qualify for traditional patent protection. More broadly, the quick reaction shows the importance that Congress attaches to this area of the law and puts individuals and companies on notice that increased indictments may occur down the line.

U.S. v. Aleynikov involved Sergey Aleynikov, a Russian immigrant who worked as a computer programmer at Goldman Sachs & Co. (“Goldman”). At Goldman, Aleynikov helped develop a high-frequency trading system to make large-volume trading decisions in fractions of a second. The confidentiality of such trading systems is strictly maintained both because of the enormous expense in creating them and because a party with access to such a system would be able to anticipate the trading strategies of anyone using the system. In early 2009, Aleynikov accepted an offer to work at a start-up where he would be tasked with developing a similar high-frequency trading system from scratch. Shortly before attending a going-away party hosted for him by Goldman, Aleynikov downloaded several hundred thousand lines of source code related to the high-frequency trading system. A month later he was arrested at the Newark, New Jersey, airport with a flash drive in his possession and charged with multiple offenses. Ultimately, Aleynikov was convicted on December 10, 2010, of violating two statutes and sentenced to more than eight years’ imprisonment.

The first conviction, under the National Stolen Properties Act 18 U.S.C. § 2311, et seq., was for transporting foreign goods, wares, or merchandise with a value of at least $5,000 in interstate commerce and while knowing the same to have been stolen. The second conviction, under the Economic Espionage Act 18 U.S.C. § 1831, et seq., was for downloading trade secrets “related to or included in a product that is produced for or placed in interstate or foreign commerce” with intent to convert the trade secret and injure its owner to the economic benefit of another. Aleynikov appealed to the Second Circuit, which reversed both convictions in April 2012. U.S. v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). Regarding the economic espionage count, the court held that the Goldman source code Aleynikov stole was not “produced for” or “placed in” interstate or foreign commerce, because the code was designed only for internal use, created no good for interstate commerce, and was never sold or licensed to third parties. Accordingly, Aleynikov’s taking of the source code was beyond the bounds of what the federal law prohibited and the court ordered the conviction reversed and the charges dismissed. (It is noteworthy that Aleynikov was charged under state law in New York a few months after the Second Circuit’s decision.)

The new Theft of Trade Secrets Clarification Act is intended to respond to this holding by expanding the scope and reach of the Economic Espionage Act. Specifically, the Clarification Act amends Section 1832(a) to cover internal trade secrets “related to a product or service used in or intended for use in” commerce, e.g., source code for a high-frequency trading system. Needless to say, this expansion could include internal processes of doing business or gathering information that may not qualify for traditional patent protection. More broadly, the quick legislative action also reveals a desire to protect the confidential items of economic value against espionage. In fact, another amendment, signed by President Obama on January 14, 2013, increases the maximum penalties, including fines for revealing trade secrets to foreign entities, and directs the United States Sentencing Commission to review and, if necessary, amend sentencing guidelines for economic espionage. H.R. 6029 (112th). Clearly, Congress is prepared to put the weight of federal criminal law against the theft of trade secrets, including source code. What remains to be seen, however, is whether the congressional will to address economic espionage will someday lead to a federal private right of action to pursue economic espionage or if cooperation with prosecutors will be the only federal remedy left.

To review the amendment, please see the Clarification Act.

Should you have questions, please contact:

Franceska O. Schroeder
Principal
Washington, DC
schroeder@fr.com
202-626-7718
© Copyright 2013 Fish & Richardson P.C. These materials may be considered advertising for legal services under the laws and rules of professional conduct of the jurisdictions in which we practice. The material contained in this newsletter has been gathered by the lawyers at Fish & Richardson P.C. for informational purposes only and is not intended to be legal advice. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Legal advice of any nature should be sought from legal counsel. For more information about Fish & Richardson P.C. and our practices, please visit www.fr.com.

 

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