September 25, 2017

Second Circuit Issues Opinion in Aleynikov: Limits Scope of the EEA, Urges Congress to Take Action

On February 27, 2012, Law360 published my article about the Second Circuit’s “stunning reversal” of the conviction of former Gold Sachs Group Inc.’s programmer Sergey Aleynikov for stealing proprietary source code from the bank’s high-frequency trading program in violation of the Economic Espionage Act (“EEA”) and the National Stolen Property Act (“NSPA”). The Second Circuit acted to reverse the conviction only hours after hearing oral argument, and ordered the trial court to enter a judgment of acquittal. The Court said that that time that an opinion would follow in “due course.”

The Second Circuit issued its opinion today finding that the HFT program is an intangible property that does not constitute a “goods, ware or merchandise” as required by the NSPA. The Court concluded that “[w]e join other circuits in [holding] . . . that the theft and subsequent interstate transmission of purely intangible property is beyond the scope of the NSPA.”

With regard to the EEA, the Court found that the language in section 1832 requiring that the trade secrets be related to products “produced for” or “placed in” instate or foreign commerce must be read as a term of limitation since this language is present in section 1832, and which does not appear in the otherwise parallel section 1831, foreign espionage statute. The Court held that because the HFT system was not intended “to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not an offense under the EEA.”

I wrote in my article that, depending on the scope of the Second Circuit’s decision, the EEA may not apply to trade secrets relating to products still in the development stage because such products have not actually been placed in interstate commerce. Although not at issue in Aleynikov, the Second Circuit distinguished the Aleynikov circumstances from a product under development. The Court indicated that products that are under development and have not yet been “placed in” interstate commerce, are still protected by the EEA, because they “can properly be described as being ‘produced for’ . . . commerce.” The Court, thus, carefully avoided the concern I raised. [Read more…]

Chinese Corporate Spying Case is Just the Tip of the Iceberg

Bloomberg Law released on March 19, 2012 my interview regarding the Economic Espionage Act.

Intellectual Property & Computer Crimes, Release 17

The 17th update to my book, Intellectual Property & Computer Crimes, was just released.  It features an analysis of a recent Ninth Circuit case brought under section 1030(e)(6) of the Computer Fraud & Abuse Act.  In United States v. Nosal, the Ninth Circuit considered whether an employer’s use restrictions should define when an employee “exceeds authorized access,” under the CFAA or whether a prior Ninth Circuit decision,  LVRC Holdings LLC v. Brekka, required dismissal on the ground that an employee does not exceed authorized access to a computer by accessing information unless the employee has no authority to access the information.  The Ninth Circuit also addressed defendant’s assertion that the government argument would lead to an “Orwellian situation” that will “make criminal out of millions of employees who might use their computers for personal use.”  The Ninth Circuit’s ultimate holding serves as a reminder to employers to draft policies outlining those activities which constitute authorized access to the company’s computers and those which are prohibited.

Other topics addressed in the Release include:

Application of the defense of copyright misuse in the civil arena.

Whether using a password or security code to access a copyrighted work, even without authorization, constitutes “circumvention” under Section 1201(a) of the DMCA.

Where the anti-circumvention provisions of the DMCA require a connection between the technological measure circumvented and a protected copyright interest, whether that nexus is limited only to proof of actual infringement.

Appellate court’s adoption of a broader definition of copyright management information under section 1202 of the DMCA.

Report to Congress from the office of the National Counterintelligence Executive highlighting the risks posed to U.S. companies and the U.S. economy from economic espionage in cyberspace committed by foreign governments and agents.

Different standards for finding a violation under the Economic Espionage Act Act and Uniform Trade Secrets Act.

Advantages for government and private litigants from parallel civil and criminal trade secret proceedings.

 

The Second Circuit Overturns Aleynikov Conviction Under the EEA

 In a stunning reversal, the Second Circuit on February 17, 2012, reversed the conviction of former Goldman Sachs’ programmer, Sergey Aleynikov, for stealing proprietary source code from the bank’s high-frequency trading program in violation of the Economic Espionage Act (“EEA”) and the Interstate Transportation of Stolen Property Act (“ITSP”).  When Aleynikov was convicted on December 10, 2010, the government claimed that it represented a major step in it’s efforts to increase the protection of intellectual property in the United States. Aleynikov has been in prison since February 24, 2011, when the district court revoked his bail and remanded him based on a finding that he posed a risk of flight.  However, only hours after hearing oral argument, the Second Circuit overturned the conviction and ordered the trial court to enter a judgment of acquittal.  The court simply said that an opinion would follow in “due course.”  On February 18, 2012, the court revoked its mandate that the trial court issue an acquittal allowing the U.S. Attorney’s Office to seek a hearing en banc.  I wrote an article on a number of the issues raised by this case that is scheduled to be published soon by Law360.  I will  post a copy of the article after it is published.  I was also quoted by Law360 in an article on this case entitled “Ex-Goldman Coder’s Acquittal Threatens Wall Street’s IP.”  If you are interested in reading a copy of this article, click here.

Chief Judge Rader on the Patent Pilot Program

In a speech on January 18, 2012, at Stanford Law School, Chief Judge Rader of the Federal Circuit Court of Appeals described how he thought the Patent Pilot Program would specifically affect patent litigation in the United States, and litigation in the U.S., in general. (In a previous post, Pilot Patent Litigation Program is Here – Is It In a Court Near You?, I described the basics of the Patent Pilot Program).

While Judge Rader addressed a number of aspects of the Patent Pilot Program, he focused on the potential to reduce patent litigation expenses.  According to Chief Judge Rader the Patent Pilot Program provides the way for the “patent system to lead to an economically defensible adjudication model” by allowing courts “to address more effective ways to reduce the cost of discovery.”  If this is successfully done in patent cases, Judge Rader believes that it will be “the tip of the spear” in improving all U.S. civil litigation.  Rader also cited the Federal Circuit’s Advisory Committee’s Model Ediscovery Order as “step one” in a plan to reduce discovery costs.

China/Russia Steal Trade Secrets from U.S. Visitors

In case you missed it, the New York Times published a front page article on February 11, 2012, entitled,”Traveling Light in a Time of Digital Thievery,” which describes how foreign governments, especially the Chinese and Russians, steal government information and trade secrets from digital devices carried by U.S government and corporate employees.  The article quotes, Joel F. Brenner, formerly the top counterintelligence official in the office of the director of national intelligence that “[i[f a company has significant intellectual property that the Chinese and Russians are interested in, and you go over there with mobile devices your devices will get penetrated.”  The article also provides a number of examples of organizations, including the U.S. Chamber of Commerce, whose computers were hacked and did not even know about it for several months after the valuable information had been stolen.  The bottom line is that companies with employees who do business in China and Russia must be particularly sensitive to this issue and should learn from the example of Google that prohibits its employees from bringing sensitive data to China and requires employees to bring only a loaner laptop to China or have their own laptop inspected upon their return to the United States.

What the article does not point out is that the state sponsored theft of trade secrets  from U.S. corporations is not limited to those thefts committed outside the United States.  As noted in my previous post, The Latest on the Economic Espionage Act, I am analyzing the approximate 125 prosecutions that the government has brought to date under the EEA and, while I have not finished, my research suggests that foreign entities are increasingly seeking to steal the trade secrets from U.S. corporations.  Many of the early prosecutions under the EEA, especially during the EEA’s first five years involved a single defendant, usually a U.S. citizen, who stole trade secrets with the intent to start a domestic company.  More recently, however, an entirely new type of defendant has emerged.  Out of the 15 most recent prosecutions under the EEA, approximately 12 have involved defendants who, at least according to the U.S. government were intending to start a foreign company or for theft to benefit a foreign company or entity.  For example, on September 28, 2011, Yuchun Yang was indicted for theft of trade secrets from his former employer,  CME Group.  Yang allegedly downloaded and removed computer source code and other proprietary information from CME while at the same pursuing business plans to improve an electronic trading exchange in China.  According to the indictment, Yang and two unnamed business partners, allegedly developed business plans to form a business referred to as the Tongmei (Gateway to America) Futures Exchange Software Technology Company (Gateway), with the purpose of increasing the trading volume at the Zhangjiagang, China, chemical electronic trading exchange (the Zhangjiagang Exchange).  Yang allegedly expected that Gateway would provide the Zhangjiagang Exchange with technology to allow for high trading volume, high trading speeds, and multiple trading functions.

These and other recent cases highlight the risk posed to U.S. companies by foreign theft of trade secrets and that the resulting loss of the information has never been higher.  If you want further information about how to better protect your trade secrets, please see my book, Intellectual Property & Computer Crimes or contact me directly at www.ptoren@wmclaw.com.  My analysis of the EEA will also be available shortly.

 

 

Weisbrod Matteis & Copley

I’m thrilled to have joined Weisbrod Matteis & Copley as a partner. The firm’s lawyers are sophisticated, energetic, and practical, and their plaintiff-focused practice and emphasis on alternative fee arrangements are very innovative.  I have no doubt that we will do great things together.   If you would like to see how Law360 covered it, click here.  

Weisbrod Matteis & Copley PLLC is a Washington, D.C. law firm that represents corporate and individual plaintiffs in a variety of areas, including business and financial disputes, disputes with insurers, intellectual property claims and theft of trade secrets, public interest litigation, and whistleblower claims against government contractors.  The firm’s clients include Fortune 500 companies, prominent financial institutions, entrepreneurs, inventors, whistleblowers, and other individuals. To learn more about Weisbrod Matteis & Copley, visit www.wmclaw.com.

The Latest on the Economic Espionage Act

On January 13, 2012. a former Dow Chemical Co. scientist, David Liu, was sentenced to five years in prison under the Economic Espionage Act (EEA) for stealing trade secrets from Dow.  A jury found Liu guilty last February.  Liu came to the U.S. from China for graduate work and began working at Dow in 1965 and retired in 1992.  While at Dow, Liu had access to trade secrets and confidential and proprietary information relating to Dow’s chlorinated polyethlene, a rubber used in automotive and industrial hoses, electrical cable jackets and vinyl siding.  Liu traveled extensively in China to market the stolen information.

The Liu case highlights the danger to corporations posed by the theft of trade secrets, especially where the thief intended to benefit a foreign competitor.  The EEA was enacted in 1996  in response to concerns that foreign companies and countries were targeting U.S. companies.  Unfortunately, these concerns have been borne out.  Currently, I am analyzing the approximate 125 prosecutions that the government has brought to date under the EEA.  While my research is not complete, I have noticed a disturbing trend.  Many of the early prosecutions under the EEA, especially during the EEA’s first five years involved a single defendant, usually a U.S. citizen, who stole a corporation’s trade secrets with the intent to open his or her company.  More recently, however, an entirely new type of thief has emerged. Out of the 15 most recent prosecutions under the EEA, approximately 12 have involved defendants who, at least according to the U.S. government, were intending to start a foreign company or stole the trade secret to benefit a foreign company or entity.  For example, on September 28, 2011, Yuchun Yang was indicted for theft of trade secrets from his former employer,  CME Group.  Yang allegedly downloaded and removed computer source code and other proprietary information from CME while at the same pursuing business plans to improve an electronic trading exchange in China.  According to the indictment, Yang and two unnamed business partners, allegedly developed business plans to form a business referred to as the Tongmei (Gateway to America) Futures Exchange Software Technology Company (Gateway), with the purpose of increasing the trading volume at the Zhangjiagang, China, chemical electronic trading exchange (the Zhangjiagang Exchange).  Yang allegedly expected that Gateway would provide the Zhangjiagang Exchange with technology to allow for high trading volume, high trading speeds, and multiple trading functions.

These and other recent cases highlight the risk posed to U.S. companies by foreign theft of trade secrets and that the resulting loss of the information has never been higher.  If you want further information about how to better protect your trade secrets, please see my book,Intellectual Property & Computer Crime or contact me directly at www.ptoren@wmclaw.com.  My analysis of the EEA will also be available shortly.

 

Pilot Patent Litigation Program is Here – Is It In a Court Near You?

At the beginning of the 2010, President Obama signed into law a 10-year patent pilot program, separate from the American Invents Act, designed to enhance the expertise of district court judges in handling patent cases.  Pursuant to the law, the Director of the Administrative Office of the United States Courts has selected 14 district courts to participate in the program, including all four districts in California, and the Southern and Eastern Districts of New York.

Pursuant to the program, certain judges within each selected district court will be designated to hear patent cases. The designated judges are to be provided with additional resources including funding for clerks specializing in patents, as well as training regarding patent cases. Under the program, when a new patent case is filed, it will be assigned randomly to any judge in a district. But if the randomly assigned judge is not a designated patent judge, he or she may decline to accept the case, and it will be reassigned to one of the designated judges.  While the stated goal of the program is not to create “specialized” patent courts within a jurisdiction, it is likely to have such an effect.  It has been my experience as a patent litigator that many federal judges do not like to preside over patent cases for a variety of reasons.  This program gives federal judges the ability to opt-out and it is certainly more than possible that some federal judges will do so.  Intended or not, this will likely lead to a few judges hearing a lot of patent cases.

The program is likely to have an impact in the following areas: (1) Time to Resolution.   (2) Quality and Predictability of Rulings; (3) Less Cost and Greater Frequency; and (4) Increased Filings.

 

[Read more…]

How to Avoid Losing Your Trade Secrets When Moving To the Cloud

A company’s decision to move the storage of its data and information to the cloud is not without business and legal risks and should not be taken lightly.  One of the legal issues that has not figured prominently in a discussion of the risks is whether and how the storage of confidential information on the cloud may affect its classification as a trade secret.  Given the importance of trade secrets to many companies’ bottom line, this issue should not be overlooked in deciding whether to move to the cloud.

The crucial issue in many trade secret litigations is whether the trade secret owner has undertaken “reasonable efforts” under the circumstances to maintain secrecy.   So long as secrecy is maintained, the trade secret remains protectable under trade-secret law. This means that unlike other forms of intellectual property, trade secrets can remain protected indefinitely. Conversely, public or other inadvertent disclosure of the trade secret results in the loss of its protection.

The test of what constitutes a “reasonable effort,” focuses primarily on the actions of the trade secret owner and the value of the trade secret.   There are literally hundreds of decisions discussing what does and what does not constitute a reasonable measure when undertaken by the trade secret owner.  However, there is little or no guidance as to what happens when an owner gives up control and protection of the trade secret to a third party, for example, by contracting with a vendor to store their confidential information in the cloud. The issue is no longer whether the trade secret owner has undertaken reasonable efforts to protect the trade secrets, but whether the trade secret owner has hired a third party who is required to adequately protect the confidential information and does, in fact, do so.

Although there have been no reported decisions addressing this issue, the test to determine whether the trade secret owner has employed reasonable measures would seem to involve a two-part inquiry, whether the trade secret owner (1) has hired a vendor who claims to use reasonable measures; and (2) has conducted sufficient due diligence that makes it reasonable to believe that the cloud vendor actually does employ such measures.  In other words, the test involves both objective and subjective components.

First, with regard to the protective measures claimed by the cloud vendor, it is essential for the trade secret owner to understand the technical details of how the cloud vendor processes, transmits, and destroys customer data.  In particular, and at a minimum, a trade secret owner should ensure that its data is kept separate from other customers, that it is encrypted using a robust encryption standard, that the servers storing the data are physically protected and that when the customer no longer needs the information that it is actually deleted from all of the systems.

Second, it is not enough for the trade secret owner to simply rely on the representations of the cloud vendor, but the trade secret owner must be satisfied that the cloud vendor actually does follow the claimed protective measures. In that respect, the vendor should warrant to the protective steps it undertakes, and that the confidentiality terms should extend beyond the termination of the agreement.  In addition, the vendor must accept responsibility for its employees, agents and subcontractors and, trade secret owners should consider requiring the cloud vendor to have insurance covering all types of events leading to the loss in value of the information at levels that reflect the value of the information being stored.

How a court will determine under what circumstances information stored in the cloud will lose its trade secret status has yet to be determined. However, by being aware of the issue, and undertaking the steps described above, a company should be in a better position should it have to convince that it took reasonable steps to maintain the secrecy of its trade secret stored in the cloud.