Criminalizing Trade Secret Theft: The Economic Espionage Act of 1996

In an attempt to address trade secret theft at the federal level, the federal Economic Espionage Act of 1996 ("EEA") was signed into law on October 11, 1996 and became effective immediately. The EEA imposes criminal liability and corresponding fines and/or prison sentences on persons or entities who violate the EEA.

Liability can attach to any person or entity which intentionally or knowingly engages in any of the following actions: theft or concealment of a trade secret; deceptively obtaining a trade secret; duplication of a trade secret without authorization; knowingly receiving or purchasing a wrongfully obtained trade secret; or attempt or conspiracy to commit any of the above acts. While the EEA has yet to be tested in court, companies may be able to reduce the risk of liability under the EEA by adopting the following policies:

1. Providing written notice to all employees that the company has a policy against receiving, using or purchasing any trade secrets belonging to third parties;
2. Providing training to new employees regarding misuse of third party trade secrets;
3. Including a provision in employee proprietary rights agreements, consultant agreements, and other similar agreements prohibiting the use of trade secret material which such individuals or entities may have acquired from third parties; and
4. Implementing an audit policy to periodically determine whether the company is in compliance with the above.

Employers concerned about their trade secrets being revealed by employees leaving the company or by strategic partners who receive the information pursuant to license agreements might gain additional protection under the EEA by taking the following measures:

1. Adopting policies of conducting exit interviews that inform departing employees of applicable laws and their duties to preserve confidences of the Company; and
2. Revising agreements that give access to trade secret information to more closely reflect the EEA's definition of a trade secret.

What is a Trade Secret?

The EEA defines a "trade secret" in a substantially similar manner to the definition in the Uniform Trade Secret Act ("UTSA"), model trade secret legislation that has been adopted by many states including California. The UTSA and EEA protect information including formulae, patterns, compilations (including business contact lists), programs, devices, methods, techniques, and processes that:

1. derive independent economic value from not being generally known or ascertainable by others, and
2. are the subject of reasonable efforts to maintain secrecy. Thus, under the EEA, information that is not readily known, and which an entity takes reasonable steps to maintain the secrecy of would qualify as a trade secret.

The EEA applies only to:

• trade secrets related to or included in products placed in interstate commerce (deriving the power to so regulate through Congress' power over interstate commerce), or
• acts of foreign entities (deriving the power to so regulate through Congress' power over foreign affairs).

Liability, Penalties and Procedures

The EEA, unlike most state trade secret acts, does not provide a private civil cause of action for damages, but provides criminal penalties for the breach, which means actions must be brought by the U.S. attorney. Organizations (other than foreign instrumentalities, which are discussed below) can be fined up to $5,000,000 for violations of the statute. The EEA further provides that the fruits of the violation, as well as any property used to commit or facilitate the violation, may be forfeited to the United States. Lastly it is worth noting that courts may, in lieu of the monetary fine portion of the penalty, choose to impose alternate fines under 18 USC 3571(d), which in many cases allow for fines of up to twice the amount gained by the defendant or lost by others as a result of the offense.

Liability under the EEA is only triggered by intentionally or knowingly committing one of the proscribed acts mentioned above. Thus employers may reduce the risk of liability under the act by implementing procedures that target this knowledge element of a violation.

The EEA provides for two key procedural provisions that would affect proceedings brought under the statute. The first gives courts the ability to enter such orders as may be appropriate to maintain the confidentiality of the trade secret, a provision obviously very valuable to the trade secret holder. The second permits the Attorney General to obtain injunctive relief against violators of the act. The latter provision puts some teeth into the EEA for aggrieved trade secret holders -- while they are not entitled to damages under the statute, by pressing for prosecution which may result in an injunction, their actions may prevent the defendant from using the information that is allegedly a trade secret.

Trade secret law has traditionally been the province of the states and has not been preempted by federal laws related to intellectual property protection. The EEA follows this precedent by expressly stating that its provisions do not preempt any other trade secret remedies; thus leaving open existing avenues of redress via civil actions for aggrieved companies.

International Considerations.

A significant goal of the EEA was to remedy perceived problems facing U.S. business from foreign thefts of trade secrets. A violation of the EEA by or with knowledge that the violation will benefit a foreign instrumentality triggers fines of up to $10,000,000 for organizations and $500,000 and 15 years imprisonment for individuals. Foreign instrumentalities under the EEA are defined as entities substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government.

The EEA also applies to any violations of the Act outside of the U.S. if:

1. the offender was either a natural person who is a U.S. citizen or resident alien, or is an organization organized in the U.S., or
2. any act in furtherance of the offense was committed in the U.S..

Conclusion.

Even though the lack of a private course of action under the EEA may result in little enforcement of the statute, and there is no interpretative guidance from the courts to date, the EEA creates significant new liabilities for violations of trade secret law. Due to the extent of the penalties, employers would be well-served to revise their policies and form agreements to attempt to lessen the risk of criminal liability as well as take advantage of the protections the EEA offers. We will keep you updated regarding new developments relating to the EEA.