July 29, 2014

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.

The decision by the Second Circuit may have a significant impact on the government’s ability to prosecute cases, including existing cases under the EEA. For example, on September 28, 2011, a federal grand jury in Chicago indicted Chunlai Yang for theft of trade secrets from his former employer, the CME Group, Inc., which operates an electronic trading platform called Globex. The indictment states “CME created Globex for its own use and did not make publically available.”

It alleges that while employed by CME, Yang downloaded over 1,000 computer files containing CME computer source code to his personal computer at home with the intention of increasing the trading volume at an electronic trading exchange in China. Thus, as in Aleynikov, Yang allegedly misappropriated computer source from an internal electronic trading platform. While there is no certainty that the Seventh Circuit would agree with Second Circuit’s decision, the decision could put the Yang prosecution at-risk as well as any other EEA prosecutions alleging theft of a trade secret that was developed for internal use.

Justice Calabresi, in a concurring opinion, concluded by stating that “I wish to express the hope that Congress will return to the issue and state in appropriate language, what I believe they meant to make criminal in the EEA.”

In an apparent oversight by the United States Attorney’s Office, the government probably could have avoided Aleynikov’s total acquittal had the office charged him with criminal copyright infringement. There is no doubt that under the Copyright Act, Goldman Sachs had a copyright in the source code to the HFT system which Aleynikov copied without authorization. In order to prove criminal copyright infringement, the government must also prove that Aleynikov willfully infringed Goldman’s copyright in the source code and did so for commercial advantage or private financial gain.

The former is generally proven by circumstantial evidence, and in this case, the government could have proved willfulness by, for example, introducing evidence that Aleynikov affirmatively sought to hide his copying, that the source contained a copyright notice or that Goldman had notified its employees that it owned the copyright in all work product created for the company and that copying without authorization was a violation of company policy.

With regard to the to the commercial advantage or private financial gain element, the standard is not whether the defendant actually made a profit, but whether the defendant engaged in the infringing conduct with the hope or expectation of a profit. Certainly, one possible explanation of Aleynikov’s activities is that he copied the source code with the expectation that the copying would pay off financially at his new job. By including a count of criminal copyright infringement, the government may very well have preserved Aleynikov’s conviction for copying Goldman Sachs’ source code.

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