By John E. Daniel

The Economic Espionage Act of 1996 became law several months ago. It criminalizes the misappropriation of trade secrets and makes the violator liable for fines and imprisonment. It also provides for the forfeiture of property used to violate, or derived from a violation of, the law. It has special provisions and higher penalties for violations by persons acting on behalf of foreign governments and, under certain circumstances, can apply to conduct outside the United States. Simply put, the stakes have been raised dramatically for those who would consider trying to misappropriate trade secrets in the United States.

The Act appears as a new Chapter 90, entitled "The Protection of Trade Secrets", to Title 18 of the United States Code. Nine sections have been added - Sections 1831-39. The first two sections describe the two types of violations covered by the Act.

Economic Espionage

The first type of violation is "economic espionage" which, basically, is trade secret misappropriation on behalf of a foreign government. Section 1831 defines three types of conduct, all relating to trade secrets, and makes it a violation for a person who, "intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly" engages in such conduct. The three forms of conduct proscribed by Section 1831 are as follows: One who

"(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret;

(3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization."

Subsection (4) of Section 1831 makes it a violation to attempt to commit any offense described in subsections (1) - (3) above. In turn, subsection (5) makes conspiracy to commit any offense described in subsections (1) - (3) a violation.

"Trade secrets" are defined fairly broadly in the Act:

"The term 'trade secret' means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if -

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public."

"Foreign instrumentality" and "foreign agent" are likewise broadly defined. For example, the former covers "any agency, bureau, ministry, component, institution, association, or any legal, commercial, or business organization, corporation, firm, or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government".

A person convicted of economic espionage can be fined up to $500,000 or imprisoned not more than fifteen years, or both. Any organization that violates this section can be fined as much as $10 million.

Theft of Trade Secrets

The second type of violation covered by the Act is delineated in Section 1832, which is entitled "Theft of Trade Secrets". This violation is not limited to misappropriation that benefits foreign interests. Instead, it takes the same conduct referenced in Subsections (1) - (3) described above and makes it a violation "knowingly" to do so "with intent to 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 thereof, and intending or knowing that the offense will injure any owner of that trade secret". Attempts and conspiracy to commit are proscribed as well.

An individual who violates Section 1832 can be fined up to $500,000, the same as for committing economic espionage. The maximum prison term and corporate fines, however, are lower for theft of trade secrets than for economic espionage. The maximum imprisonment is ten years, while the maximum fine for an organization is $5 million.

Foreign Conduct

Importantly, Section 1837 makes the Act applicable to conduct outside the United States. Two types of such conduct come within the Act. The first is where the offender "is a natural person who is a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof". The second is where "an act in furtherance of the offense was committed in the United States". Since most forms of trade secret misappropriation and economic espionage would include some act committed "in furtherance of the offense" within the United States, the extraterritorial application of the Act seems to be substantial.

Forfeiture

The Act's penalties are not limited to fines and imprisonment. Section 1834 provides for criminal forfeiture in two situations. First, the Act provides for forfeiture of any property "constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of such violation". Second, it provides for forfeiture of "property used, or intended to be used, in any manner or part, to commit or facilitate the commission of [a] violation"; however, in this second case forfeiture would occur only "if the court in its discretion so determines, taking into consideration the nature, scope and proportionality of the use of the property in the offense". The Act provides that property subject to forfeiture will be governed, with some exceptions, by the forfeiture procedures set forth in Section 413 of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (21 U.S.C. 853).

Protecting Trade Secrets

In order to protect the victim of a violation, provision is made to protect trade secrets that form the subject of proceedings under the Act. More particularly, Section 1835 provides that a court shall enter a protective order to preserve the confidentiality of trade secrets. Moreover, in the event a court elects to authorize disclosure of any such trade secret, the United States (but not the owner) can seek an interlocutory appeal to preserve the secret's confidentiality.

Other Provisions

The Act is not solely criminal in nature. It also authorizes the U.S. Attorney General to bring a civil action to obtain appropriate injunctive relief against any violation of the Act.

The Act was not meant to replace other Federal or State laws covering the conduct in question. Thus, the Act specifically states in Section 1838 that it "shall not be construed to preempt or displace such other laws relating to the misappropriation of a trade secret".

Certain conduct is excepted from the scope of the Act. More particularly, the Act does not prohibit any otherwise lawful activity conducted by a State, Federal or local government entity. Nor does it prohibit the reporting of a suspected violation of law to any governmental entity if such entity has lawful authority concerning that violation.

Mr. Daniel is a partner in Rogers & Wells' New York office and is in the Firm's Intellectual Property and Technology Law Group.

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