Obama Administration Reports on Efforts to Prevent Trade Secret Misappropriation

by McDonnell Boehnen Hulbert & Berghoff LLP

Washington - White House #3The Obama Administration issued a Report earlier this month, entitled "Administration Strategy on Mitigating the Theft of U.S. Trade Secrets," that sets forth its efforts to prevent trade secret misappropriation.  The Report involves the Departments of Commerce, Defense, Homeland Security, Justice, State, Treasury, Director of National Intelligence, and the Executive Office of the President, and the U.S. Trade Representative (USTR) in the effort.  The Obama Administration, as evidenced by this document, recognizes the contributions made to the economy by intellectual property, but also that some of that creativity cannot be captured by traditional intellectual property tools such as patents, copyrights, and trademarks.  In this regard the Report cites increases in trade secret theft and industrial espionage, citing The Office of the National Counterintelligence Executive (ONCIX), "Foreign Spies Stealing US Economic Secrets In Cyberspace", November 2011, at 1.  These efforts at trade secret misappropriation take the form of recruitment of former employees by foreign corporation and governments as well as "cyber" attacks on "electronic repositories" of trade secrets.  All these activities harm the U.S. economy and national security, according to the preamble of the Report.

The Administration enunciates a policy in protecting trade secrets to prevent foreign corporations or governments "to gain an unfair economic edge" from trade secret misappropriation.  The Report sets forth 5 "Strategy Action Items":

1.    Focus Diplomatic Efforts to Protect Trade Secrets Overseas

The Report indicates that the Obama Administration intends to "continue to apply sustained and coordinated diplomatic pressure" on other governments to discourage trade secret theft.  This will be done by directing a "sustained, consistent and coordinated message from all appropriate agencies to foreign governments" and by pressuring governments to "take steps to strengthen their enforcement against trade secret theft."  Trade secret theft by governments will be raised "at the most senior levels" of the Administration, including officials from the "Departments of Commerce, Defense, Justice, Homeland Security, State, Treasury and the U.S. Trade Representative."  This pressure will be diplomatic, through representatives from the Department of State, as well as through attempts at coalition building by representatives from the Department of Commerce and the USTR.  The Administration will also implement trade secret protection protocols at U.S. Embassies in countries "known to present high-­risk conditions for trade secret theft" particularly through their IPR Working Groups.

Under this Action Item are included "Trade Policy Tools" directed towards "increase[ing] international enforcement against trade secret theft to minimize unfair competition against U.S. companies."  These include:

•    Deeper cooperation with trading partners that share U.S. interests with the objective of promoting enhanced trade secret and other intellectual property protection in ways that are consistent with U.S. approaches and helpful in curbing trade in goods and services containing stolen trade secrets;

•    Targeting weaknesses in trade secret protection through enhanced use of the annual Special 301 process, including the Special 301 Report, action plans and related tools to gather and, where appropriate, act upon information about the adequacy and effectiveness of trade secret protection by U.S. trading partners;

•    Seeking, through USTR­-led trade negotiations such as the Trans Pacific Partnership, new provisions on trade secret protections requiring parties to make available remedies similar to those provided for in U.S. law; and

•    Continuing to raise trade secret protections as a priority issue in all appropriate bilateral, regional, and multilateral trade discussions and appropriate trade and IP-­related forums, including the Trade-­Related Aspects of Intellectual Property Rights Council and the Asia­ Pacific Economic Cooperation, informed by interagency and stakeholder input regarding partners and issues of concern.

Also included in this Action Item are efforts to increase international law enforcement cooperation, international training and capacity-building, and involvement of international organizations (the counterparts of the U.S. Departments that sponsored this Report).

2.    Promote Voluntary Best Practices by Private Industry to Protect Trade Secrets

Some of the responsibility for increased protections for trade secrets depend on efforts by private companies.  The Administration contends that companies "need to consider whether their approaches to protecting trade secrets keeps pace with technology and the evolving techniques to acquire trade secrets enabled by technology."  Under this Action Item, the Report commits the Administration to "help facilitate efforts by organizations and companies to develop industry led best practices to protect trade secrets," in an effort led by the U.S. Intellectual Property Enforcement Coordinator (IPEC).  The Report, in a caveat that could bring the whole effort to naught, qualifies the scope of such voluntary, coordinated efforts by private companies, limits the scope of these practices to those "consistent with [U.S] antitrust laws.  Suggestions for such "best practices" include:

•    Research and development compartmentalization;

•    Information security policies;

•    Physical security policies; and

•    Human Resources policies.

And the Administration's efforts will be qualified by the statement that "it should be emphasized that such guidelines are intended solely to offer suggestions to assist businesses in safeguarding information they wish to keep secret and are not designed to be a minimum standard of protection."

3.    Enhance Domestic Law Enforcement Operations

These efforts are led by the FBI, which in 2011 "increased the number of trade secret theft investigations by 29 percent from 2010" as a result of the Attorney General's Task Force on Intellectual Property.  These efforts are a "top priority" at the Bureau, according to the Report, with the FBI "expanding its efforts to fight computer intrusions that involve the theft of trade secrets by individual, corporate, and nation­state cyber hackers."  This Action Item also notes that the Office of the Director of National Intelligence is involved in coordinating the efforts of "the intelligence community" in assisting private companies in resisting trade secret theft.  The Office of the National Counterintelligence Executive (ONCIX) will share "threat warnings" and increase awareness in the private sector using (unspecified) "counterintelligence tradecraft procedures tailored to the private sector."  The regional scope of these efforts are illustrated in the following map:

RCIWGSeveral "national outreach organizations, including the Domestic Security Alliance Council, the National Security Business Alliance Council, and InfraGard" will also be involved with the FBI in "local, regional and national efforts" intended to "reach a broad swath of companies in multiple sectors such as information technology, communications, aeronautics, engineering, energy, financial services, and consumer retail."

Enforcement of U.S. trade secret laws will be facilitated through training by the FBI and the DOJ of prosecutors and investigators, targeting "domestic law enforcement officers, prosecutors, and international partners."  The Department of Defense also has a role in this effort, and "will collect, analyze and report on threat information to cleared industries that support Department of Defense programs and the missions of other U.S. government departments and agencies" and will "deliver security training and education on counterintelligence."

4.    Improve Domestic Legislation

The Report cites several legislative initiatives, including:

•    Public Law112-236—The Theft of Trade Secrets Clarification Act of 2012 (S. 3642), closed a loophole in the Economic Espionage Act that had allowed the theft of valuable trade secret source code.  This legislation was introduced by Senate Judiciary Chairman Senator Patrick Leahy in response to the Second Circuit decision in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), which overturned a verdict that found that the defendant violated 18 U.S.C. § 1832(a) by stealing proprietary computer code, a trade secret, from his employer.  This legislation was in line with the overall IPEC objective of protecting trade secrets from misappropriation.

•    Public Law 112-269—The Foreign and Economic Espionage Penalty Enhancement Act of 2012 (H.R. 6029/S. 678), bolstered criminal penalties for economic espionage and directed the Sentencing commission to consider increasing offense levels for trade secret crimes.  Its passage is an important step in ensuring that penalties are commensurate with the eco­nomic harm inflicted on trade secret owners.  The passage of this legislation could not have been achieved without the efforts of former House of Representatives Judiciary Chairman Representative Lamar Smith and retired Senator Herb Kohl.

5.    Public Awareness and Stakeholder Outreach

The report concludes by listing efforts by the Department of Commerce, the U.S. Patent and Trademark Office and the FBI to increase public awareness of trade secret theft.  The Report also sets out websites having additional information, including:

•    Department of Commerce STOPfakes.gov IPR training module includes an introduction to trade secrets (available here).

•    Special 301 Report released by the U.S. Trade Representative summarizes troubling trends involving trade secrets and forced technology transfer (available here).

•    The Department of State (available here).

•    DOJ National Security Division (available here).

•    DOJ Criminal Division - Computer Crimes and Intellectual Property Section (available here).

•    FBI Counterintelligence Division (available here).

•    National Intellectual Property Rights Coordination Center (available here).

•    The Office of the National Counterintelligence Executive (available here).

•    The Department of Defense – Defense Security Service (available here).

•    Create.org study that includes recommendations for companies operating in foreign coun­tries to mitigate the risk of trade secret theft (available here).

•    The World Intellectual Property Organization (WIPO) has more trade secret information specifically designed for small and medium-­sized enterprises (available here).

Sprinkled throughout the Report are specific instances of trade secret misappropriation, limited (of course) to those instances detected or thwarted, including:

1.    Theft of Ford Motor Company Trade Secrets

In April 2011, Yu Xiang Dong was sentenced to 70 months in federal prison for theft of trade secrets and economic espionage.  Yu was a former Ford Motor Company employee who resigned to work at Beijing Automotive Company.  He copied 4,000 Ford documents onto an external hard drive, which he took to China.  Ford valued the loss of the trade secrets at $50 million dollars.

2.    Theft of DuPont Trade Secrets

Hong Meng was a research chemist for DuPont.  He was involved in researching Organic Light Emitting Diodes (OLED).  DuPont's OLED research efforts resulted in the development of a breakthrough and proprietary chemical process for OLED displays.  Mr. Meng stole trade secret compounds and passed them to a Chinese university.  He was caught by the FBI and prosecuted by the U.S. Attorney's Office for the District of Delaware and was sentenced to 14 months in federal prison.  DuPont valued the loss of the trade secrets at $400 million dollars.

3.    Theft of General Motors Trade Secrets

On November 30, 2012, a Federal jury in Detroit found Shanshan Du, a former General Motors (GM) engineer, and her husband, Yu Qin, both found guilty of stealing GM trade secrets related to hybrid vehicle technology worth $40 million.  Du and Qin tried to pass the trade secrets to Chinese automaker Chery Automobile Company.

4.    Theft of Cargill and Dow Chemical Trade Secrets

In October 2011, Kexue Huang, a former employee of both Cargill and Dow Chemical passed trade secret information to a Chinese university that was developing organic pesticides on behalf of China's government.  Financial losses to both companies from his criminal acts exceed $7 million.  In December 2011, after many months of hard work by FBI agents, CCIPS prosecutors and the U.S. Attorneys' Offices in Indiana and Minnesota, Huang was sentenced to 87 months in prison -- the strongest sentence possible.

5.    Theft of Valspar Trade Secrets

David Yen Lee worked for Valspar, an Indiana paint company.  He stole trade secrets from Valspar and tried to pass them to Nippon Paint in China.  Mr. Lee purchased a plane ticket to China, but was caught by the FBI before he could leave the U.S.  On December 8, 2010, Mr. Lee was sentenced to 18 months in prison.  Valspar valued the trade secrets between $7 and $20 million.

6.    Theft of Motorola Trade Secrets

In November 2011, Customs and Border Protection officers at Chicago's O'Hare Airport stopped Hanjuan Jin, a former Motorola software engineer, while she was allegedly carrying 1,000 sensitive Motorola documents, $30,000 in cash, and a one­way ticket to China.  Jin was in the process of traveling to China to turn over stolen trade secret information relating to mobile telecommunications to Kai Sun News Technology Co., also known as SunKaisens, and to the Chinese military.

7.    Theft of Goldman Sachs Trade Secret

Goldman Sachs spent $500 million dollars developing computer source code to support its high frequency trading program.  Sergey Aleynikov, a Goldman Sachs computer programmer, resigned from his job to work for a competitor, and on his final day of employment transferred this extremely valuable proprietary computer code to an external computer server.  Mr. Aleynikov had also transferred thousands of proprietary computer code files to his home computers.  Mr. Aleynikov was investigated by the FBI and prosecuted by the U.S. Attorney's Office of the Southern District of New York.  He was sentenced to 97 months in Federal prison.  In February 2012, his conviction was overturned by the Second Circuit based on the court's interpretation of the Economic Espionage Act.  This loophole was fixed when President Obama signed Public Law 112­236 The Theft of Trade Secrets Clarification Act of 2012 (S. 3642) on December 28, 2012.

The Obama Administration's record on intellectual property policy is spotty at best, including as it does the Department of Justice's benighted position of the patent-eligibility of isolated human DNA and the laughable "magic microscope," as well as comments as recently as last week illustrating that the President has at best an uninformed opinion on intellectual property issues (see video of comments).  But the Report is replete with precatory admonitions on the value of intellectual property, including statements by the President that:

Our single greatest asset is the innovation and the ingenuity and creativity of the American people.  It is essential to our prosperity and it will only become more so in this century.

We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy.

The proof of this particular pudding will be whether the Administration follows through on the aims and goals set forth in the Report.

Written by:

McDonnell Boehnen Hulbert & Berghoff LLP

McDonnell Boehnen Hulbert & Berghoff LLP on:

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