Edited by Paul Devinsky and Rita Weeks
Patents / Claim Construction
Guidance on Construing Claim Construction, a.k.a.
Diminutive Claim Construction
by Rose Whelan
Addressing the issue of construing language in a claim construction order (language not found in the claims), the U.S. Court of Appeals for the Federal Circuit reversed a finding of non-infringement based on incorrect claim construction. Advanced Fiber Technologies v. J & L Fiber Services, Case No. 11-1243 (Fed. Cir., April 3, 2012) (Lourie J.) (Dyk, J. dissenting-in-part).
The patented technology in this appeal involved screening devices used in the pulp and paper industry. The three independent claims of the asserted patent include the term "screening medium" or its synonym "screening plate." The district court constructed "screening medium" as a "perforated barrier through which stock is passed to remove oversized, troublesome, and unwanted particles from good fiber." At AFT's request the district court also construed the term "perforated," which appeared in this construction, but did not appear in the claims, as "pierced or punctured with holes." Based on its construction, the district court granted summary judgment of non-infringement in favor of the defendant. AFT appealed.
On appeal, the Federal Circuit found that the district court incorrectly construed "perforated" and provided guidance on how to conduct what it called "derivative claim construction." Although the Court noted that it does "not ordinarily construe words that are not in claim," where such derivative construction of a non-claim term is required, courts must follow the guiding principles set forth in Phillips, namely that the specification informs the proper construction. The Court further instructed that just with any claim construction, the ultimate goal in derivative construction "is determining the meaning and scope of the patent claims asserted to be infringed."
The Federal Circuit concluded that the district court erroneously construed perforated using extrinsic evidence that contradicted the intrinsic record. Specifically, in construing "perforated," consistent with dictionary definitions, to mean "pierced or punctured with holes." The Federal Circuit explained that the district court did not give due weight to the explicit disclosure of an embodiment utilizing a wedgewire screen. The disclosure of wedgewire screens was inconsistent with the district court's definition because the openings in wedgewire screens are merely gaps between individual wires, and not formed through piercing or puncturing. The Court found that the prosecution history did not show any disclaimer of the wedgewire disclosure and that the correct construction of "perforated" in this context is simply "having holes or openings."
Judge Dyk file a separate decision dissenting in part with respect to the construction of "screening medium," "screening plate," the derivative construction of "perforated" and reversal of summary judgment of non-infringement. Specifically, Judge Dyk found that the prosecution history, in connection with method claim in the patent that recites a method of manufacturing a screen plate, and the understanding of on skilled in the art at the time of the invention, all supported the district court's construction of "perforate."
Patents / Legislation
Pre-AIA Patent Infringement Filings Still Subject to
by Paul Devinsky
In a decision that is limited to infringement suits filed prior to the September 16, 2011 date of enactment of the America Invents Act (AIA), the U.S. Court of Appeals for the Federal Circuit, in a case involving 18 cloud storage defendants, has concluded that district courts should stringently apply mis-joinder analysis when the joinder is challenged. In re EMC Corp., Case No. 11-M100 (Fed. Cir., May 4, 2012) (Dyk, J.).
Oasis Research, a company having an office but no personnel in Marshall, Texas, filed suit in the U.S. District Court for the Eastern District of Texas, naming 18 cloud storage companies as defendants. Several of the defendants moved to sever and transfer the claims against them to other venues. The magistrate judge rejected the motions, concluding that the services of all the defendants were not "dramatically different" from each other. Several of the defendants (including EMC) filed a writ to the Federal Circuit seeking a venue transfer.
The Federal Circuit, after noting that § 299 of the AIA has no retroactive affect, analyzed the dispute under the joiner consideration set forth in Fed. R. Civ. P. 20. Under Rule 20(a)(2), defendants can only be joined if the claims against them are asserted "with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences," and there is a "question of law or fact common to all defendants." The Federal Circuit rejected Oasis contention that alleged infringement of the same patent supports joinder, although the Court did acknowledge that the claims would raise common questions of claim construction and patent invalidity.
Rather the Court explained that the transaction-or-occurrence test must also be satisfied by showing "a logical relationship between the separate causes of action" against the defendants. As Judge Dyk explained: "[T]he logical relationship test is satisfied if there is substantial evidentiary overlap in the facts giving rise to the cause of action against each defendant. In other words, the defendants' allegedly infringing acts, which give rise to the individual claims of infringement, must share an aggregate of operative facts."
The Federal Circuit concluded that the district court's "not dramatically different" standard was inadequate to satisfy Rule 20, as it "seems to require little more than the existence of some similarity in the allegedly infringing products or processes, similarity which would exist simply because the same patent claims are alleged to be infringed."
In remanding the case to the district court to reconsider whether joinder was appropriate, the Court noted that joinder of independent defendants is only appropriate "where the accused products or processes are the same in respects relevant to the patent." In cases in which the defendants are not acting in concert, claims should only be joined when "the facts underlying the claim of infringement asserted against each defendant share an aggregate of operative facts."
The Court further noted that "[i]ndependently developed products using differently sourced parts are not part of the same transaction, even if they are otherwise coincidentally identical." Although the Federal Circuit acknowledged that a district court has considerable discretion in weighing factual considerations such as the relationship among the defendants or joint licensing or technology agreements, in cases where only "a common question of law or fact" is at issue, a lower court should not use its discretion to consolidate. The Federal Circuit also noted the availability of multidistrict litigation under 28 U.S.C. §1407 for claim construction and invalidity challenges. (See IP Update, this issue—In re Bear Creek Technologies). However, it noted that in "a complicated patent litigation" ... "a district court would be justified in exercising its discretion to deny joinder 'when different witnesses and documentary proof would be required.'"
Patents / False Marking
Rule 9(b) Applies to False Marking Claims
by Eric Garcia
In denying an appellant's motion for reconsideration, the U.S. Court of Appeals for the Federal Circuit found that the Leahy-Smith America Invents Act (AIA), which amended the false marking statute to retroactively eliminate the qui tam provision from the false marking statute, did not violate the Takings or Due Process Clauses of the United States Constitution. Rogers v. TriStar Prods., Inc., Case Nos. 11-1494; -1495 (Fed. Cir., May 2, 2012) (Bryson, J.; Schall, J.; Prost, J.) (per curiam).
Rogers had initially filed his complaint against TriStar, alleging that TriStar had violated the false marking statute by marking its juicing products with words or phrases claiming that its products were subject to patent protection, when in fact, they were not. The district court dismissed the suit, finding that the false marking statute violated the Take Care Clause of the Constitution because the statute failed to provide the executive branch with sufficient control over the suit. Rogers appealed to the Federal Circuit. While the appeal was pending, the president signed into law the AIA, thereby amending the false marking statute to retroactively eliminate the qui tam provision. Because Rogers conceded that he could not meet the new standing requirement, the Federal Circuit dismissed the appeal as moot. Rogers then filed a motion for reconsideration, challenging dismissal of his appeal on the grounds that the AIA's amendment violated the Takings and Due Process Clauses.
The Federal Circuit first noted that in civil cases, no litigant is entitled to insist that a law that prevailed at the time the case began shall remain unchanged solely for his or her benefit. In addition, no "vested" right attaches to a suit merely because a complaint is filed. The fact that Rogers brought a qui tam action did not alter the Court's position. Although the Supreme Court has described qui tam statutes as "effecting a partial assignment of the Government's damages claim," the "assignments" were revocable prior to final judgment. Accordingly, the Federal Circuit held that the AIA's amendment did not violate the Takings Clause.
Regarding Rogers' Due Process arguments, the Federal Circuit reasoned that Rogers failed to explain how Congress acted irrationally in retroactively eliminating the qui tam provision. The Federal Circuit found that Congress was attempting to rein in abuses in false marking actions by limiting such suits to only those parties who had actually suffered a competitive injury as a result of the false marking. That objective, the Federal Circuit noted, was a legitimate justification for making the AIA amendments retroactive. Accordingly, the Federal Circuit held that the AIA's amendment did not violate the Due Process Clause.
Practice Note: Given this decision by the Federal Circuit, it now appears likely that the era of "false marking trolls" is finally over. (See IP Update, Vol. 14, No. 3; Vol. 13, No. 9; Vol. 13, No. 1). However, there may be at least one more part of the saga to pay out. Public Patent Foundation, Inc., in the appeal to the Federal Circuit of the dismissal of its false marking suit against McNeil-PPC (alleging marking using expired patents on Tylenol® packaging) has asked the Federal Circuit to take its appeal en banc; i.e., to attempt to avoid the controlling panel decision in Rogers.
I'll Drink to That! (Trade Dress)
by Natalie A. Bennett
In a case focusing on trade dress for a bourbon bottle, the U.S. Court of Appeals for the Sixth Circuit has now expressly adopted the "aesthetic functionality" doctrine for trademark protection. The bourbon bottle in issue was the subject of extensive historical and anecdotal treatment at the outset of the opinion. Writing for the panel, Judge Boyce Martin affirmed that Maker's Mark's "signature trade dress element—a red dripping wax seal—is due protection." Maker's Mark v. Diageo N. Am., Case Nos. 10-5508; -5586; -5589 (6th Cir., May 9, 2012) (Martin, J.).
Bourbon producer Maker's Mark sued the producers of Jose Cuervo tequila over the red dripping wax seal found on their premium "Reserva de la Familia" bottles. Finding that Maker's Mark occupies a "central place in the modern story of bourbon," with secondary meaning acquired through years of strong advertising and brand marketing, the panel agreed that the registered trademark was "extremely strong."
A central issue on appeal was whether the red dripping wax seal was invalid due to its alleged aesthetic functionality. Prior to the issuance of this decision, the 6th Circuit had not clarified its test for aesthetic functionality and declined to do so here. However, with due regard for the Supreme Court dicta regarding aesthetic functionality in TrafFix Devices v. Marketing Displays, Inc. (see IP Update, Vol. 4, No. 5), the analysis centered on whether the protected feature "serves a significant function" and whether "the exclusive use of that feature by one supplier would interfere with legitimate competition." In applying the two alternative tests, the 6th Circuit endorsed the aesthetic functionality doctrine and concluded that under either rationale Jose Cuervo's arguments in support of its cancellation counterclaim failed.
First, under a comparable alternatives inquiry, the design was not functional because it would not be difficult or costly for a competitor to design around the red wax seal. As recognized by the district court, there is more than one way to seal a bottle with wax to make it aesthetically appealing. Under such circumstances, the court concluded a mark holder can prevent competitors from using a confusingly similar design. Second, under the effective competition test, the court concluded the design was not functional because it did not hinder a competitor's ability to succeed in the market. For example, Cuervo would not be at a disadvantage by being precluded from using the red wax because it could still be successful by using a different color seal.
After determining that the dripping wax trademark was enforceable, the court affirmed the infringement finding through application of the 6th Circuit's Frisch factors. The court discussed each of the eight factors and determined there was a likelihood of consumer confusion. The strength of the red wax seal was found to be inherently distinctive based on its physical uniqueness and its commercial recognition. The 6th Circuit found that the similarity between the red dripping wax on the Maker's Mark and Cuervo products also contributed to the likelihood of confusion, even if there were identifying labels and even in the absence of meaningful evidence of actual confusion.
Practice Note: A theme guiding Judge Martin's discussion was that the wax seal is not functional because it was not essential to the bourbon bottle. Given that the red dripping wax had been a "hallmark" on Maker's Mark since 1958, the court concluded that the circumstances in support of trademark protection were compelling.
Trademarks / Criminal Counterfeiting
Fashion Fakes: No Counterfeit Burberrys® Allowed
by Sarah Bro
The U.S. Court of Appeals for the Fourth Circuit affirmed convictions of criminal counterfeiting based on the defendants' manufacture, importation and sale of handbags and wallets bearing marks "substantially indistinguishable" from the registered trademarks of fashion house Burberry, namely Burberry's signature colored plaid pattern (the "Burberry Check" mark), which was registered with the U.S. Patent and Trademark Office (PTO) in 1996. In upholding the convictions, the 4th Circuit found that there was sufficient supporting evidence presented at trial, and that certain contested statements of the law made by the government did not deprive the defendants of a fair trial due to curative jury instructions from the district court. United States v. Lam, Case No. 11-4056 (4th Cir., April 16, 2012) (Duncan, J., Shedd, J., joining) (Floyd, J., partial concurrence, partial dissent and dissent from the judgment).
The defendants owned or controlled at least 10 U.S. companies engaged in importation of legitimate and counterfeit handbags and wallets. They also had authority over at least three companies in China and Hong Kong that manufactured and exported counterfeit goods.
The criminal charges were based on three different seizures by U.S. Customs and Border Patrol (CBP) during a two-month period in 2005. Shipments addressed to one of the defendants' companies were seized in Norfolk, Virginia and contained handbags and wallets bearing alleged counterfeit Burberry marks hidden amongst legitimate handbags.
After they were indicted on charges of conspiracy to traffic counterfeit goods under 18 U.S.C. §371, trafficking counterfeit goods under §2320(a) and smuggling under §545, the defendants' first trial (in the U.S. District Court for the Eastern District of Virginia) resulted in a hung jury.
To obtain a conviction under §2320(a), the government is required to prove that the defendants intentionally used a mark which is known to be counterfeit in connection with trafficking or attempted to traffic goods or services. Under the statute, a counterfeit mark is defined as use of "a spurious mark ... that is identical with, or substantially indistinguishable from, a mark registered ... in the United States Patent and Trademark Office and in use."
Before the trial, the defendants filed a motion in limine seeking to have the district court declare the phrase "substantially indistinguishable" unconstitutionally vague. The district court denied the motion.
At trial, the government presented evidence including CBP testimony, authentic Burberry handbags and testimony that Burberry filed a civil suit in 2005 against one of the defendants' companies which resulted in a consent judgment in Burberry's favor. That lawsuit was based on a U.S. copyright application filed by one of the defendants' companies for an equestrian knight (similar to another registered Burberry trademark) superimposed over a plaid pattern resembling the Burberry Check mark.
Also during trial, the government indicated, on several occasions, that whether a claimed counterfeit mark was "substantially indistinguishable" from a legitimate mark should be based on the opinion of a "reasonable consumer of ordinary intelligence," or an "average person." The defendants objected to the government's phrasing as an incorrect statement of the law, and the objections were sustained by the district court. The district court then instructed the jury that it was to apply the definition of the law as set forth by the court and not by the government, and it instructed the jury to compare the marks side-by-side using their "own eyes" to decide for themselves whether they were "substantially indistinguishable." The jury then found the plaid pattern on the seized goods to be a counterfeit of the Burberry Check mark, and the defendants were found guilty on all charges.
The defendants moved for acquittal and a new trial, claiming that the evidence was insufficient as a matter of law and that the government's misstatements deprived them of a fair trial. Although the district court agreed that the government's misstatements of the law were misleading and extensive, it used the 4th Circuit's six-part test from U.S. v. Lighty to determine that the defendants received a fair trial, because the government did not intend to purposely mislead the jury, and because the evidence was sufficient to support the convictions absent the misstatements. Thus, the motions were denied.
On appeal to the 4th Circuit, the defendants challenged the sufficiency of the evidence presented by the government to show that the marks were "substantially indistinguishable." The 4th Circuit, however, held that the marks were similar enough to allow a reasonable jury to conclude that the defendants' goods were fake, especially in view of evidence that Burberry often sells goods that contain both the Burberry Check mark and the Burberry equestrian knight mark, even if the marks were not registered as one unitary mark. In addition, because the defendants sold the same category of goods as Burberry (i.e., handbags and wallets), the court found such evidence was sufficient to support the jury's finding that the marks were "substantially indistinguishable."
The court also dismissed the defendants' claim that the counterfeiting statute was unconstitutionally vague. Construing the language of the statute as a whole, the 4th Circuit held that the plain language of the statute was unambiguous in defining the degree to which a spurious mark must resemble a registered trademark to be determined counterfeit.
Finally, the 4th Circuit held that the district court did not abuse its discretion in ruling that its curative instructions to correct the government's misstatements at trial were sufficient. The 4th Circuit determined that the defendants were afforded a fair trial and affirmed the district court's rulings.
Judge Floyd dissented from the judgment because he believed that the government's misstatements of the law at trial deprived the defendants of a fair trial. In particular, Floyd thought the government attempted to mislead the jury due to the frequency and severity of its statements during trial and closing arguments.
Copyrights / DCMA
How Deep Is the Safe Harbor?
by Paul Devinsky
In a case that has now been in litigation for more than five years, and in an appeal that drew close to a hundred amici briefs, the U. S. Court of Appeals for the Second Circuit has explained its position on the contours of the Digital Millennium Copyright Act's (DCMA's) safe harbor provision that limits the liability of online service providers who permit users to post content on their websites. Viacom Int'l v. YouTube, Case No. 10-3270 (2nd Cir., April 5, 2012) (Cabranes, J.).
The trial court granted summary judgment to YouTube on all claims of direct and secondary copyright infringement, concluding that YouTube was immune from liability under the safe harbor provision of the DCMA, 17 U.S.C. § 512.
Viacom appealed and the 2d Circuit has now reversed the summary judgment. While reiterating that liability (for copyright infringement) under the DCMA requires proof that an online service provider has "knowledge or awareness of specific infringing activity," the 2d Circuit vacated the summary judgment concluding that "a reasonable jury could find that YouTube had actual knowledge or awareness of specific infringing activity on its website." In its remand, the 2d Circuit instructed the district court to determine, for some specific video clips, whether YouTube had knowledge or awareness of specific instances of infringement and instructed the district court to apply the "willful blindness" doctrine "in appropriate circumstances." The Second Circuit also instructed the district court to review whether YouTube's right and ability to control infringement on its site made the DMCA's safe harbors inapplicable.
Copyrights / Litigation
Fact Issues Preclude Summary Judgment in Fabric Design
by Elisabeth (Bess) Malis
The U.S. Court of Appeals for the Ninth Circuit recently reversed and remanded a district court's grant of summary judgment in a copyright infringement action over fabric design, concluding that genuine issues of material fact existed with respect to access and substantial similarity. L.A. Printex Industries, Inc. v. Aeropostale, Inc., Case No. 10-56187 (9th Cir., Apr. 9, 2012) (Gould, J.).
L.A. Printex, a Los Angeles-based fabric printing company, designed a floral pattern and registered it with the U.S. Copyright Office. L.A. Printex discovered that Aeropostale, a mall-based clothing retailer, was selling shirts bearing a floral design allegedly similar to that created and registered by L.A. Printex. Mrs. Bubbles, Inc., a Los Angeles-based apparel wholesaler, supplied the shirts to Aeropostale. L.A. Printex sued Aeropostale and Mrs. Bubbles for infringement of its copyrighted floral design. The district court granted summary judgment in favor of defendants, holding that there was no genuine issue of material fact regarding the defendants' non-access to the plaintiff's copyrighted design, as well as that the design between the parties' fabrics went only to the unprotectable idea of small-scale floral patterns. L.A. Printex appealed.
The 9th Circuit reversed. Absent direct evidence of copying, the court explained that a copyright plaintiff can demonstrate infringement by showing that the defendant had access to the copyrighted material and that there is a substantial similarity between the works. First, the court noted that L.A. Printex raised a genuine dispute of material fact as to access. Proof of access requires "an opportunity to view or to copy plaintiff's work." Evidence that a copyrighted work was widely disseminated can prove access. The Court found that L.A. Printex's sale of more than 50,000 yards of fabric bearing its floral design qualified as "widespread dissemination." Further, as L.A. Printex and Mrs. Bubbles both operate in the Los Angeles apparel industry, the court found it conceivable that Mrs. Bubbles had an "opportunity to view and copy" the plaintiff's design.
Second, noting that summary judgment is "not highly favored" on questions of substantial similarity in copyright cases, the 9th Circuit found that a genuine dispute of material fact as to substantial similarity existed under the "extrinsic" (or objective) test for substantial similarity. The court noted that a reasonable juror could find that the parties' floral designs are substantially similar, due to objective similarities in the pattern, arrangement and color arrangement of the flower bouquets in the design. Turning to the "intrinsic text" of substantial similarity, which is a subjective comparison focusing on whether an "ordinary, reasonable observer" would find the works substantially similar, the Ninth Circuit concluded that that in this instance, the determination was not appropriate for summary judgment and must be decided by a jury.
On this basis, the 9th Circuit reversed the district court's grant of summary judgment in favor of the defendants and remanded the case for further proceedings.
Practice Note: Once a copyright plaintiff has established a triable issue of fact as to objective similarities between the works at issue, the substantial similarity analysis is no longer suitable for summary judgment and should be submitted to a trier of fact.
Copyrights / First Sale Doctrine
Supreme Court to Decide Application of First Sale
Doctrine to Foreign-Made Copyrighted Works
by Rita Weeks
The U.S. Supreme Court has agreed to hear a case involving "gray market" resale of copyrighted works and the defense of the "first sale doctrine." The "first sale doctrine" in copyright law permits the owner of a lawfully made copy of a copyrighted work to resell or otherwise dispose of that copy without limitations imposed by the copyright holder. Kirtsaeng v. John Wiley & Sons, Inc., Docket No. 11-607 (Supr. Ct., April 16, 2012). Essentially the same issue was raised at the Supreme Court in 2010 but the Court ended up in a 4-4 split (with Justice Kegan recusing herself).
Textbook publisher John Wiley & Sons brought a copyright infringement suit against Kirtsaeng, a graduate student from Thailand. Kirtsaeng's friends and family shipped him foreign editions of Wiley textbooks printed abroad by Wiley's affiliate Wiley Asia, which Kirtsaeng then sold on commercial websites such as eBay for allegedly substantial profits. Wiley alleged that Kirtsaeng violated Wiley's copyrights by unauthorized importation of textbooks only intended for a foreign market. Kirtsaeng attempted to proffer the "first sale doctrine" as a defense but the district court rejected the applicability of the defense to foreign editions of textbooks. A jury found Kirtsaeng liable for willful copyright infringement and awarded Wiley $600,000 in statutory damages.
On appeal to the Second Circuit, Kirtsaeng argued that the district court erred in holding that the first sale doctrine was not an available defense, but the U.S. Court of Appeals for the Second Circuit affirmed the district court (see IP Update, Vol. 14, No. 9). The 2d Circuit, reviewing § 109(a) of the Copyright Act, codification of the first sale doctrine, noted that the language limiting its application to works "lawfully made under this title" was ambiguous such that the statute neither compelled or foreclosed application of the first sale doctrine to works manufactured abroad. Therefore, the 2d Circuit then looked to § 602(a)(1) of the Copyright Act, which prohibits the importation of a work acquired abroad without the copyright owner's authorization, and the Supreme Court's guidance in Quality King Distributors, v. L'anza Research International. Quality King involved copyrighted works manufactured in the United States that were exported to foreign distributors, who then re-imported the works back into the United States for resale without the copyright owner's permission. In that context, the Supreme Court unanimously held that the first sale doctrine limited the scope of § 602(a) and thus the foreign distributor who re-imported the works could assert the first sale doctrine as a defense. However, the Quality King Court did not rule on whether the first sale doctrine would apply to works manufactured outside of the United States, however. Nevertheless, the 2d Circuit in Kirtsaeng held that the first sale doctrine only applies to products physically manufactured in the United States. To find otherwise, the court reasoned, would nullify the protections of § 602(a)(1) in the vast majority of cases.
In granting certiorari, the Supreme Court order indicated it will consider whether such a foreign-made product can never be resold within the United States without the copyright owner's permission; can sometimes be resold within the United States without permission, but only after the owner approves an earlier sale in this country; or can always be resold without permission within the United States, so long as the copyright owner authorized the first sale abroad. Oral arguments will be heard in the fall of 2012.
Practice Note: The grant of certiorari is significant because the Supreme Court's 4-4 decision in Costco Wholesale Corp. v. Omega, S.A.. In that case Costco legitimately acquired Omega-brand watches through a company that bought and imported the watches from overseas at much lower prices than Costco would otherwise have paid. While copyright owner Omega had authorized the initial foreign sale of the watches, it did not authorize their importation into the United States or their resale by Costco. The U.S. Court of Appeals for the Ninth Circuit held that the first sale doctrine did not apply to purchases made outside of the United States, and an equally split Supreme Court agreed. The Supreme Court's decision in Kirtsaeng should resolve the question of how the first sale doctrine and § 602 apply to copies of copyrighted works made and legally acquired abroad and then imported into the United States. It is expected that this decision will be of particular importance to importers, distributors and retailers of copyrighted goods produced abroad.
Trade Secret Misappropriation / Criminal Prosecution
Ex-Employee Escapes Economic Espionage Act
by Stephen M. Yu
Addressing for the first time the Economic Espionage Act in a case involving stolen high-frequency-trading source code, the U.S. Court of Appeals for the Second Circuit held that a computer programmer's theft and transfer of an employer's proprietary source code did not constitute a criminal offense under either the Economic Espionage Act of 1996 (EEA) or the National Stolen Property Act (NSPA). U.S. v. Aleynikov, Case No. 11-1126 (2d Cir., Apr. 11, 2012) (Jacobs, J.) (Calabresi, J., concurring).
Under the EEA, 18 U.S.C. § 1832(a) it is a criminal offense to intentionally "convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner." The NSPA, 18 U.S.C. § 2314 also makes it a federal offense for anyone to "transport, transmit, or transfer in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud."
The district court convicted Sergey Aleynikov, a computer programmer, of violating both the EEA and NSPA when he stole proprietary source code from his employer, Goldman Sachs, in an effort to develop a competing high frequency trading (HFT) system for his new employer. Goldman's source code is a carefully guarded trade secret in its HFT system, which involves the execution of large trades based on rapid decisions made by complex algorithms for seizing fleeting markets opportunities. On his last day at Goldman, Aleynikov encrypted and uploaded Goldman's HFT source code to a server in Germany, then downloaded the code to his home computer. Aleynikov later transferred the code to a laptop and flash drive which he took to his new employer. Aleynikov appealed his conviction.
On appeal, the 2d Circuit vacated the convictions under both the EEA and NSPA, finding Aleynikov was wrongly charged on both counts. Notwithstanding the evidence of theft, the Court held that stealing Goldman's source code did not amount to espionage within the meaning of the EEA. The court reasoned that since Goldman's HFT was used strictly internally and with no intention of selling or licensing it to anyone, the HFT system was not a product "produced for" or "placed in" the stream of commerce. As a result, Aleynikov was found not to have committed espionage under the EEA.
In vacating the NSPA conviction, the 2d Circuit joined several other circuits in relying on Dowling for the proposition that the theft and interstate transmission of purely intangible property is not subject to prosecution under the NSPA. Because Aleynikov stole purely intangible property embodied in a purely intangible format and since he did not "assume physical control" over anything tangible, i.e., goods, wares or merchandise, he was erroneously subjected to prosecution under the NSPA.
As noted by the 2d Circuit, Aleynikov was indicted on a third count under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030(a)(2), which was later dropped upon finding that Aleynikov did not exceed the scope of his authorization. Under the CFAA, authorized use of a computer in a manner that misappropriates information is not a federal offense. U.S. v. Nosal (see IP Update, Vol. 14, No. 5).
To read Part 1 of this article please click on the 'Previous Page' link below.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.