United States: Economic Espionage Act Convictions Announced

On December 14, 2006, Fei Ye and Ming Zhong, both residents of the State of California, pleaded guilty to two counts each of violating Section 1831 of the Economic Espionage Act (EEA). 18 U.S.C. § 1831. According to the U.S. Department of Justice (DOJ), these represent the first two convictions under this section of the EEA, which deals with the theft of trade secrets for the benefit of a foreign nation.

Ye and Zhong were arrested in the San Francisco airport on November 23, 2001 while boarding a flight to China. In their luggage, authorities located trade secret information from Sun Microsystems and Transmeta Corporation. Ye and Zhong admitted they had stolen the trade secrets and had intended to use them to design a computer microprocessor to be manufactured and marketed by a company they had established, Supervision, Inc. Supervision was to provide a share of its profits to the City of Hangzhou and the Province of Zhejiang in China, from which Supervision was to receive start-up funding.

The EEA criminalizes both foreign economic espionage and the misappropriation of trade secrets. 18 U.S.C. §§ 1831-1839. The Act was passed in 1996 in response to a perceived need to close a gap in the federal law, and to better protect intellectual and intangible property. H.R. Rep. No. 104-788, reprinted in 1996 U.S.C.C.A.N. 4021, 4024, 4025. Congress’ intent in enacting the EEA was "to ensure that the theft of intangible information is prohibited in the same way that theft of physical items are protected." S. Rep., No. 104-359, 1996 WL 497065 (Leg. Hist.) at *15.

DOJ regularly obtains convictions under Section 1832 of the EEA, which prohibits the theft, misappropriation, unauthorized use, and possession of trade secrets related to or included in a product placed in interstate or foreign commerce to the economic benefit of anyone other than the owner. 18 U.S.C. § 1832. Section 1831 differs from Section 1832 in that it prohibits economic espionage for the benefit of a particular party – namely, a foreign government, foreign instrumentality, or foreign agent. 18 U.S.C. § 1831. Section 1831 also differs in that it provides for harsher penalties (e.g., 15 years, $500K or twice the gain/loss [individuals], $10M or twice the gain/loss [organizations]) than the criminal trade secret misappropriation prohibitions of section 1832 (e.g., 10 years, $250K or twice the gain/loss [individuals], $5M or twice the gain/loss [organizations]). See "Prosecuting Intellectual Property Crimes," CCIPS - Criminal Division, App. XI (3rd Ed. Sept. 2006), http://www.usdoj.gov/criminal/cybercrime/ipmanual/appxi.pdf. LLP The legislative history of the EEA indicates that the purpose of Section 1831 is to target government-sponsored trade secret theft, not ordinary trade secret theft by foreign corporations:

"The principle purpose of [Section 1831] is not to punish conventional commercial theft and misappropriation of trade secrets. . . . Thus, to make out an offense under [Section 1831], the prosecution must show in each instance that the perpetrator intended to or knew that his or her actions would aid a foreign government, instrumentality, or agent. Enforcement agencies should administer [Section 1831] with its principle purpose in mind and therefore should not apply section 1831 to foreign corporations when there is no evidence of foreign government sponsored or coordinated intelligence activity."

See Legislative History – Economic Espionage Act of 1996, www.usdoj.gov/criminal/cybercrime/EEAleghist.htm (Managers’ Statement for H.R. 3723).

The EEA defines "foreign instrumentality" to include "any legal, commercial, or business organization, corporation, firm, or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government." 18 U.S.C. § 1839(1). Here, Supervision’s funding and profit-sharing arrangement with the City of Hangzhou and the Province of Zhejiang placed Ye and Zhong’s misappropriation of trade secrets within the purview of Section 1831.

The EEA defines "trade secret" to include "all forms and types of financial, business, scientific, technical, economic, or engineering information" if "(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public." 18 U.S.C. § 1839(3). The EEA definition of "trade secret" is broader than that of the Uniform Trade Secrets Act, inasmuch as "the EEA protects a wider variety of technological and intangible information, . . . includ[ing] programs and codes." United States v. Hsu, 155 F.3d 189, 196 (3rd Cir. 1998).

Nonetheless, the EEA does not confer an absolute monopoly on the person who develops a trade secret. Neither parallel development nor reverse engineering of a trade secret necessarily constitutes a violation of the EEA. See www.usdoj.gov/criminal/cybercrime/EEAleghist.htm (Managers’ Statement for H.R. 3723)

Only "knowing" violations of the EEA are to be prosecuted. See U.S. Department of Justice, U.S. Attorney’s Manual, Section VIII "Theft of Commercial Trade Secrets," (U.S. Attorney’s Manual) at § B.2.b. Moreover, the U.S. Attorney’s Manual directs prosecutors not to bring EEA charges if there is a legitimate dispute over the ownership of the intellectual property at issue. It suggests that civil resolution of such disputes is more appropriate, especially if the party obtains and relies on the advice of counsel. Id. at § VIII.B.6.e.

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