Theft of Trade Secrets Now a Federal Crime

Earlier this month President Bill Clinton signed an amendment to the federal criminal code titled The Economic Espionage Act of 1996. Supporters of the act claim that it fills a glaring gap in federal law. For information technology companies, the act raises practical issues of how best to protect genuine trade secrets and ensure that their theft would fall under the act. For employees, the act highlights the difficulty of distinguishing trade secrets from other commercial information and may raise constitutional issues because the information covered by the statute is so vaguely defined.

The act makes it a felony for any person to acquire, convey or buy, or to attempt to acquire, convey or buy, without authorization of the owner, any trade secret. If the person taking the trade secret knows or intends that the action will benefit a foreign government or any business organization that is owned or managed by a foreign government, the penalties to be imposed include fines of up to $500,000 for an individual and 15 years in prison.

A second provision of the act makes it a federal felony to acquire, convey or buy a trade secret that is related to or included in a product that is produced for interstate or foreign commerce, regardless of whether there is a foreign government instrumentality involved. When there is no foreign government interest involved, then the maximum prison term is reduced to 10 years.

In addition to the criminal penalties that can be imposed for trade secret theft under the new law, Congress added a forfeiture provision similar to those found in narcotics laws. Under the clause, the government can seize any proceeds from the sale of trade secrets and any property obtained by the felon as a result of his wrongdoing. Federal prosecutors are also authorized to file civil proceedings for injunctions to prevent violation of the act. The act does not permit state or local law enforcement officials, or private citizens, to bring actions. Enforcement is, for the moment, confined to the Department of Justice. The sponsors of the legislation have stated, however, that they intend to take up the question of private civil actions under the statute in the next Congress.

The key provision of the law is its definition of "trade secret" and in distinguishing trade secrets from other commercially valuable information. A trade secret is defined as all types of financial, business, scientific, technical, economic or engineering information, whether tangible or intangible and regardless of how it is stored, if the owner has taken "reasonable measures" to keep the information secret and the information derives economic value, actual or potential, by virtue of not being generally known. The definition does not impose any specific requirements on the owners of trade secrets. The sponsors admit that what constitutes a reasonable measure to protect secrecy in one situation may not be reasonable in another.

Study of this definition should lead the owners of trade secrets to at least two conclusions: First, much of what they currently attempt to include under the umbrella of "trade secrets" or "proprietary information" in employee confidentiality agreements is not a trade secret entitled to protection under the act. Confidentiality agreements with employees may need to be rewritten to distinguish between true trade secrets and other confidential information. Failure to do so could weaken a claim that a true trade secret really is a genuine trade secret. Second, the measures taken to protect genuine trade secrets should be examined to determine whether they will meet the test imposed by the act. Failure to take proper measures could bar the employer from protection by the act and weaken a similar state law claim.

For employees, the vague definition of trade secret poses the difficult problem of trying to determine what is a genuine trade secret and what is not. How is an employee to know, before experiencing the heat of a federal prosecution, whether the employer's claim that information is a trade secret is in fact sustainable? While the sponsors of the act argue that no prosecution should be brought when the employee merely has taken with him the accumulated knowledge and experience acquired in his employment, distinguishing between mere accumulated knowledge and a specific trade secret will invoke a difficult exercise in line drawing. The chilling effect on the employee's use and expression of his rightfully acquired knowledge is made worse by failure of the act to require any specific, reasonable measures taken to protect trade secrets that could serve as signposts.

Jonathan Cain is a member of the Technology Practice Group of the law firm Mays & Valentine L.L.P. in Tysons Corner, Va.

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