On December 28, 2012, President Obama signed the “Theft of Trade Secrets Clarification Act of 2012.” This new law clarifies the scope of the “Economic Espionage Act of 1996” (18 USC §§1831-39). The enactment of the new statute is in direct response to a decision by the Second Circuit Court of Appeals in United States v. Aleynikov, 676 F3d 71 (2nd Cir. 2012).
There are various federal measures that offer protections (under threat of criminal sanction) from the theft of corporate assets. Some of these protections specifically apply to trade secrets that may be of great value to competitors in the marketplace.
In the Aleynikov case, Mr. Aleynikov had been employed by Goldman Sachs and Company as a (highly-paid) computer programmer. During the course of his employment, he assisted in the development of source code for Goldman’s proprietary high frequency trading (HFT) system, which was used by the Company in securities and commodities trading. In essence, the program facilitated Goldman’s ability to make large volumes of trades within extraordinarily short time periods.
On the last day of his employment in 2009, Aleynikov encrypted and uploaded over 500,000 lines of source code for the HFT system to a foreign server. After uploading the source code, Aleynikov deleted the encryption program and erased the history of his computer commands in an effort to cover his tracks. When he returned home, he downloaded the encrypted source code for use in his new employment with a Chicago-based company that was seeking to create its own HFT system. The following month, after returning from Chicago for a meeting with his new employer with a flash drive and laptop containing portions of the Goldman HFT source code, Aleynikov was arrested by the FBI.
A jury convicted Aleynikov of violating the Economic Espionage Act and the National Stolen Property Act. He was sentenced to 97 months of incarceration plus three years of supervised release. Aleynikov appealed the decision, arguing that the Economic Espionage Act had been construed more broadly than this law permitted.
The Second Circuit Court of Appeals agreed with him.
In overturning Aleynikov’s conviction, the Second Circuit noted that the Economic Espionage Act required that the converted trade secret “must be related to or included in a product that is produced for or placed in interstate or foreign commerce.” The Court ruled that “Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce -- it was designed to be used internally. Goldman had no intention of selling its HFT system or licensing it to anyone.”
In an effort to remedy the resulting injustice, the Theft of Trade Secrets Clarification Act of 2012 was signed by President Obama on December 28, 2012. The prior language of the Economic Espionage Act that was stricken and the requirement that a product must be “produced for or placed in interstate or foreign commerce” was replaced with language which now states that the new law protects “a product or service used or intended for use in” interstate or foreign commerce.
The new law expands the Economic Espionage Act in two significant ways. First, services as well as products are now covered by the Act. Second, covered trade secrets now include trade secrets found in products or services “used in or intended for use in” interstate or foreign commerce. Thus, the new law’s protections attach not only to assets sold or licensed to third parties but also to those which may be used by an employer to provide services to others.
Given the burgeoning importance of technology in an economy that is increasingly service-driven, this new law may be significant, as companies may now have protection for proprietary software which is developed for their internal use, regardless of whether that software is placed into “interstate or foreign commerce” through sale or license to third parties.