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CRIMINAL THEFT OF TRADE SECRETS-PART 1
Both federal and state laws prohibit the Intentional theft of trade secrets, which is subject to civil and criminal liability in the US.
INTRODUCTION
Both federal and state laws prohibit the Intentional theft of trade secrets, which is subject to civil and criminal liability in the US.
DISCUSSION
For anyone wondering whether a business executive can face criminal charges for allegedly stealing the trade secrets of a former employer or a rival company, we have the answer.
The short answer is yes!
And a recent California case confirms that the criminal consequences are harsh for perpetrators and for anyone else in their orbit who knows about the theft.
There is a noticeable recent trend to prosecute trade secret theft criminally.
What Is A Trade Secret?
In general, a trade secret is information with some actual or potential economic value because it is not generally known, and others cannot legitimately access it. In addition, the owner of the information has made reasonable efforts to maintain its secrecy.
Trade secrets, like patents and copyrights, are a form of intellectual property.
A trade secret can be a formula, physical device, idea, process, pattern, or compilation of information. To qualify as a trade secret, the information must provide a competitive advantage (i.e., have economic value), and the owner must treat the information with care to prevent the public or competitors from learning about it.
Examples of valuable trade secrets include:
- cost and price information;
- customer lists;
- the formula for an energy drink;
- a pudding recipe;
- a marketing strategy;
- a new invention before the patent application is on file;
- computer software; or
- a manufacturing process.
Almost any information with economic value and not generally known by competitors can qualify as a trade secret.
Trade secrets do not require registration with the government the way patents, copyrights, and trademarks do, and all an owner has to do is take reasonable steps to maintain secrecy. As long as the information is kept confidential, trade secret protection can attach until the information becomes public.
People cannot copy, use, or benefit from another business’s trade secrets.
Access to Another’s Trade Secrets
Business owners often have to share trade secrets with others in the ordinary course of business. Typically, they share trade secrets with:
employees who routinely come into contact with employers’ trade secrets as part of their job;
board members;
potential business partners and service providers.
Employees must honor their duties of confidentiality as to their employers’ trade secrets at all times. Members of a company’s board of directors are also duty-bound to maintain confidentiality and guard trade secrets.
Potential business partners, service providers, and others must abide by confidentiality duties typically imposed under non-disclosure agreements (NDAs). People who sign NDAs agree not to disclose trade secrets without the owner’s permission, and NDAs may be the best way for trade secret owners to protect themselves.
Two other ways people come into trade secrets information are accidentally (though still knowing that the information was confidential); and through improper means like theft, industrial espionage, or bribery.
We cover the illegal acquisition of trade secrets below.
One final note: Those who discover a trade secret on their own, by reverse engineering or otherwise, are allowed to use the trade secret information and generally would not face civil or criminal exposure.
Protecting Trade Secrets
The law requires that people who own trade secrets take reasonable steps to keep them confidential. Otherwise, they will not enjoy the legal protections that trade secrets enjoy.
Simply calling information a “trade secret” is not enough. The owner of the information must be proactive to prove their intent to keep the information secret, which means taking reasonable precautions.
When an owner of alleged trade secret information shares it in a meeting with third parties but does not ask them to sign basic non-disclosure agreements, that owner fails to take reasonable precautions.
In addition, confidential information should always bear a confidentiality stamp when possible. Owners should not widely distribute it, and they should keep it on secure computers and under lock and key. These steps would show a court or a prosecutor that the owner intends to maintain secrecy.
Non Disclosure Agreements
The most effective way to protect trade secrets is using non-disclosure agreements or NDAs. Courts have repeatedly indicated that using non-disclosure agreements is the most important way to maintain the secrecy of confidential information.
Federal Criminal Statutes
The federal government can pursue criminal charges for the theft of trade secrets under 18 US Code § 1831 (Economic espionage) and 18 US Code §1832 (Theft of trade secrets).
Economic Espionage Under 18 US Code § 1831
One of the most significant federal laws dealing with trade secret theft is the Economic Espionage Act of 1996 (EEA). 18 US Code § 1831 allows for the federal prosecution of any person or company involved in trade secret misappropriation and punishes intentional stealing, copying, or receiving of trade secrets.
Penalties for violations of this law are harsh: Individuals face fines of up to $500,000 and corporations up to $5 million. Individuals can face prison for up to ten years. The federal government can seize the proceeds derived from the theft, as well as property used or derived from the crime.
The EEA applies to trade secret thefts within the US and thefts outside the US if the perpetrator is a US citizen or corporation or if any act in furtherance of the offense occurred in the US.
If the theft is for the benefit of a foreign government or agent, the corporate fines can double, and the jail time may increase to 15 years.
Theft of Trade Secrets Under 18 US Code § 1832
A violation of § 1832 is a criminal offense carrying severe penalties. Anyone who steals trade secrets, or receives stolen trade secrets knowing that the giver obtained them unlawfully, can be punished by up to 10 years in prison plus fines.
18 USC § 1832 includes a conspiracy charge for a defendant who, working in concert with others, purposefully takes one or more steps to implement the agreement.
Other Federal Statutes
Depending on the circumstances, prosecutors can use other statutes to capture misconduct that the EEA or 18 US Code Section 1832 also covers.
For example, someone charged with stealing trade secrets may also be subject to prosecution under the Computer Fraud and Abuse Act, the National Stolen Property Act, or federal wire fraud laws. In addition, someone indicted on economic espionage charges may face charges for acting as an unregistered foreign agent and with disclosing classified information or under the general espionage statutes. Finally, under the Defend Trade Secrets Act, violations of Sections 1831 and 1832 can underpin federal racketeering and money laundering charges.
Theft of Trade Secrets Under State Laws
Many states have enacted laws making the theft of trade secrets or trade secret infringement a crime. California is one state making it criminal to acquire, disclose or use trade secrets without authorization. If convicted, people can receive fines up to $5,000, up to one year in jail, or both. Trade secret theft is essentially a form of larceny under Cal. Penal Code Section 499(c).
A Recent Criminal Case
A district court in the Northern District of California recently convicted two company directors — the company’s former Chief Executive Officer and Chief Operating Officer — for conspiracy to steal trade secrets and commit wire fraud in the biotech industry. The two officers pleaded guilty in August and will be sentenced in December 2021.
CONCLUSION
Against this background on the definition of trade secrets and the laws criminalizing the theft of trade secrets, read Part 2 in this series for a detailed discussion of a recent high-profile trade secret theft case filed in federal court in the Northern District of California.
Follow the Prison Professors blog for Part 2 of Criminal Theft of Trade Secrets. Our team regularly publishes on white-collar crime and the criminal justice system.
