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Litigation Insights

By Jason R. Canvasser / May 29, 2014

LITIGATION INSIGHTS

Congress Acts to Strengthen Trade Secret Protection

By: Jason Canvasser & Todd Skowronski

Congress recently amended the Economic Espionage Act of 1996, 18 U.S.C. § 1832 ("EEA") to reverse a controversial decision from the Second Circuit that held that the EEA does not protect a company's proprietary software from theft if that software is only used internally.

Sergey Aleynikov was a former computer programmer for Goldman Sachs & Co. who had helped develop Goldman Sachs' high-frequency trading software ("HFT"), a powerful, secret internal program used to make trades in securities and commodities.  Just before leaving Goldman Sachs for a new and highly lucrative job helping a startup company develop its own HFT software, Aleynikov transferred more than 500,000 lines of code from Goldman Sachs' computers onto his personal computers.  The bulk of the code taken was proprietary to Goldman Sachs.  He attempted to hide his tracks, but the FBI nabbed him as he flew to Chicago to begin his new job, catching him red-handed with the code on his personal laptop and flash drive.

Following trial, Aleynikov was found guilty of stealing and transferring proprietary computer source code in violation of the Economic Espionage Act of 1996, 18 U.S.C. § 1832 ("EEA"), as well as the National Stolen Property Act, 18 U.S.C. § 2314 ("NSPA"), and was sentenced to 97 months in prison followed by three years supervised release, and a $12,500 fine.  Aleynikov appealed his conviction and the Second Circuit reversed it in United States v. Aleynikov , 676 F.3d 71 (2d Cir. 2012), holding that the HFT code was neither "produced for" nor "placed in" interstate or foreign commerce, and thus did not fall under the ambit of the EEA.  The fact that Goldman Sachs went to great lengths to maintain the system's secrecy, and the fact that the system yielded enormous profits did not matter. Read narrowly, the EEA required that the software have itself been an article of commerce - either "produced for" or "placed in" interstate or foreign commerce.  But the HFT software was only used by Goldman Sachs internally - it was never sold or licensed, and thus did not enter the stream of commerce.  Aleynikov's actions were thus not a crime under the EEA.  The Second Circuit also held that Aleynikov did not violate the NSPA because the NSPA did not apply to transfers of intangible property like source code, although the NSPA does apply to transfers of money.

The Aleynikov decision exposed a glaring hole in corporate espionage law through which people like Aleynikov could steal valuable proprietary information without criminal consequence.  To address this issue and protect companies from being victimized by corporate espionage, Congress passed, and the President signed, the Theft of Trade Secrets Clarification Act of 2012 (the "Act").  The Act amends the EEA by striking the troublesome language "or included in a product that is produced for or placed in" interstate or foreign commerce, and replaces it with the language "a product or service used in or intended for use in" interstate or foreign commerce.  Consequently, a greater deal of protection is now provided to employers to protect trade secret information while making it easier for prosecutors and courts to punish violators.

The practical effect of this change is best illustrated by the effect it would have had upon Aleynikov's case.  Had the new language applied in Aleynikov's case, he would have been guilty of violating the EEA because the source code - which itself is never sold or licensed in interstate commerce - nevertheless is "used in" interstate commerce.  Goldman Sachs uses the HFT code to make trades across state lines.  So even though a company uses proprietary software only internally, so long as that software is used to transact business across state lines, its theft is punishable under the EEA.