BREAKING: David Nosal Sentenced To Prison On CFAA Computer Intrusion And Trade Secret Charges

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http://blogs.orrick.com/trade-secrets-watch/files/2014/01/8jan14-200x150.jpgFormer Korn/Ferry recruiter David Nosal was sentenced to one year and one day in prison on Wednesday for violating the federal Computer Fraud and Abuse Act and the Economic Espionage Act.

In April, a federal jury in San Francisco convicted Nosal of conspiring to gain unauthorized access to the computer system of his former employer, the executive search firm Korn/Ferry International, and to illegally obtain trade secrets.  Prosecutors said Nosal entered into an agreement with other Korn/Ferry employees in 2004 to take confidential materials from Korn/Ferry’s computer system to be used in a new business that Nosal intended to establish after he left Korn/Ferry.

At Nosal’s sentencing hearing, prosecutors pressed for prison time, saying it would deter future hacking.  “The sentence you give today to this man, who corrupted three of his friends … because $300,000 a year wasn’t enough, will go through Silicon Valley like a bell,” Assistant U.S. Attorney Matthew Parrella promised U.S. District Judge Edward Chen.

“At the end of the day, stealing is stealing, whether you use a crowbar or a computer,” said Assistant U.S. Attorney Kyle Waldinger.

Nosal’s lawyers urged probation, saying there was no evidence Korn/Ferry was harmed. “A very powerful, rich corporation did not suffer any meaningful loss,” said Nosal’s lawyer, Dennis Riordan.

Nosal addressed Judge Chen directly, saying he had come from humble roots, had worked three jobs to put himself through college and had reached the top of the executive search industry.

Because of the federal prosecution, “I have lost—I can’t even put a number on it … I have lost tens of millions of dollars.  I’ve lost my reputation.”  His voice breaking, Nosal said simply: “Monumental.”

Nosal displayed a measure of contrition, saying he was “so very sorry this happened” and “I’m sorry that ever happened” without unequivocally taking responsibility for the actions that led to his conviction.

He also showed a flash of anger when he turned to face federal prosecutors, complaining that the twin “900 pound gorillas” of Korn/Ferry and the government had tarnished his reputation by branding him a “thief.”

Judge Chen said Nosal’s up-by-the-boostraps story and “incredible amount of generosity” moved him to sentence Nosal to less than the maximum allowable prison term.  “I’m convinced Mr. Nosal has learned a lesson,” Judge Chen said.  But, he added, there was value in sending a message that could deter other similar conduct.

Judge Chen sentenced Nosal to a year and a day in prison, followed by three years of supervised release and community service.  He also imposed $60,000 in fines.  This could mean real prison time for Nosal, since the federal system has abolished parole, though Judge Chen said he expected Nosal will serve less than a year.  Nosal rested his head on his right hand as the judge read the sentence.

Chen advised Nosal that he has two weeks to appeal.  Outside the courtroom, Nosal told Trade Secrets Watch that the sentence lined up with what he expected, and that he “absolutely, positively” plans to appeal.  Another of his lawyers, Steve Gruel, told TSW that Nosal would argue that the jury that convicted him misapplied the CFAA.

Nosal, appearing tan and relaxed after returning from the British Virgin Islands, also threw down a challenge to Korn/Ferry, saying the sentence would not deter him from competing with his former employer.  “There is absolutely no way I’ll be slowed down from building the best [executive recruiting] platform in the world,” he vowed.

Nosal’s conviction followed several years of criminal prosecution by the U.S. Attorney’s Office, including an appeal to the full U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit held that the CFAA only covers certain types of thefts involving unauthorized access to computers. The appeals court interpreted the CFAA narrowly, finding that it was primarily intended to curtail hacking and that it does not bar employees from stealing trade secrets from their employers’ computers in more run-of-the-mill cases of trade secret theft. The court reasoned that the CFAA’s prohibitions against accessing a computer “without authorization” or by “exceeding authorized access” don’t apply to employees who steal from their workplace computer systems, as long as they are using their work login credentials and don’t engage in hacking to gain access.  By contrast, other federal appellate courts had held that these CFAA provisions do ban “insider” trade secret theft by employees, even those sitting at company computers with authorization.  The Fourth Circuit and a number of district courts have since joined the Ninth Circuit in reading the CFAA more narrowly.

Following its decision, the Ninth Circuit remanded the case to the federal district court in San Francisco, where Nosal was subsequently tried and convicted on related charges.