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The Economic Espionage Act of 1996:

An Experiment in Unintended Consequences?

The Berkowitz Firm, P.C.


It is not often that a lawyer gets to write about spies and intrigue. In fact, it might seem that a law as expansive as the Economic Espionage Act of 1996 ("EEA")1 is typical of government overkill for a problem that is much more serious in the movies than in reality. Recent revelations and statistical analysis indicate that this is not the case.

Rise of Economic Espionage

Economic espionage is on the rise. A survey released in 1996 by the American Society for Industrial Security showed a 323 percent increase in incidents from 1992 to 1995. 2 These incidents are occurring on both a national and international scale. The FBI reports that twenty-three foreign governments are systematically stealing intellectual assets from U.S. corporations.3 As an example, "American business executives were stunned in 1991 when the former chief of the French intelligence service revealed that his agency had routinely spied on U.S. executives traveling abroad . . . [confessing] that his agency regularly bugged first-class seats on Air France so as to pick up conversations by traveling execs, then [entering] their hotel rooms to rummage through attaché cases." 4

Likewise, in 1996, FBI statistics clearly demonstrated a sharp increase in economic espionage when they reported that pending probes of thefts by foreign companies for governments doubled from the 1994 figure to 800.5 The Cold War might be dead, but the shift in emphasis to markets instead of ideology has continued to keep spies employed. The difference is that these spies have changed their targets.

As the United States shifts from an economy based on manufacturing of tangible goods to an economy based on information, there is a shift in the economic impact of crime to theft of intellectual property. According to Fortune magazine, the FBI has stated that $24 billion a year in proprietary information was being stolen. 6 The victims of this theft include major companies such as GM, Hughes, and Lockheed-Martin. 7 High-tech spy paraphernalia, previously thought only to be in the machinations of "Q" in the James Bond thrillers, is now readily available to individuals and companies of all sizes. Thus, stealing of secrets, big and small, is easier.

When confronted with the increase in such espionage, Congress leaped into action. The question is whether it was the right action.

Previous Legal Scheme of Protection

Prior to almost universal adoption of the Uniform Trade Secrets Act ("UTSA"), 8 states relied primarily on common law remedies for theft of trade secrets. The Restatement Second of Torts defined trade secrets as:

any formula, pattern, device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.9

The U.S. Supreme Court in Kewanee Oil co. v. Bicron Corp.10 settled the issue of whether federal patent loss preempted state trade secret law by holding that both can co-exist. Subsequently, the American Bar Association ("ABA") recommended state adoption of the UTSA. The focus of the UTSA is primarily technical information, although the courts have expanded its application to include nontechnical data, such as customer lists.11

The Colorado definition is even broader than the UTSA's. It states:

"Trade Secret" means the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a "trade secret", the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes. 12

The Colorado definition includes not only the technical information provided for in the UTSA but also "confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value."13 Colorado has clearly broadened the scope of trade secret protection from traditional notions of secret formulas and the like to other business information as well.

As with previous definitions of trade secrets, whether under the Restatement or under the UTSA, the EEA requires that the owner take reasonable measures to keep such information secret. However, the EEA seems to extend the economic value requirement to include not only actual but potential value.14

Summary of the EEA

There are several elements of note when considering the application of the EEA to any client situation. The Act covers a broad range of information – some that most employees, administering trade secrets, may not have commonly considered to be a trade secret in the past. For example, the EEA's definition of trade secrets is even broader than those of the UTSA and the Restatement. It defines trade secrets as "all forms and types of financial, business, scientific, technical, economic, or engineering information, including patters, plans, compilations, program devices . . . whether tangible or intangible, and whether or how stored, compiled or memorialized . . . " 15

In addition to the broad definition, the EEA includes expansive civil and substantial criminal penalties. In fact, some of the criminal penalties associated with the EEA require consideration in circumstances that are not necessarily serious economic breaches. The fact that the EEA co-exists with state laws means that counsel must help their clients weave their way through an intricate matrix of compliance with both sets of laws.

Moreover, the statute covers not only the activities of corporations, but activity by and on behalf of foreign governments. Hence, a brief review of activity on behalf of governments also is necessary.

Foreign Activity Versus Domestic Activity

Foreign Activity: The EEA provides for a fine of up to $500,000 or imprisonment for not more than fifteen years, or both, to any person who commits the prohibited acts intending or knowing that such events will benefit any foreign government, foreign instrumentality, or foreign agent. 16 Interestingly, the EEA protects against the conveyance of a "benefit," rather than an "economic benefit," as is the case with regard to domestic espionage.17 This recognizes that the benefit, which is bestowed on a foreign government or government instrumentality, may not be of an economic nature.

The prohibited acts include unauthorized taking of trade secrets, copying trade secrets, or receiving trade secrets without authorization. The EEA also prohibits any attempt at such activity or conspiracies with others to engage in such activity. Moreover, the statute broadens this description to include any possible means of committing the offending acts, including all forms of electronic activity.

Domestic Activity: The EEA similarly prohibits taking, copying, or receiving trade secrets without authorization in the domestic context for those trade secrets that are related to or included in a product and placed in interstate or foreign commerce. However, the statute adds three requirements that are not present with regard to espionage on behalf of foreign governments or instrumentalities. The wrongful conduct must: (1) be committed with the intent to convert the trade secret; (2) economically benefit anyone other than the owner; and (3) be committed with the intent or knowledge that the offense will injure the owner of the trade secret 18The domestic offense also carries criminal penalties of up to ten years; this makes the penalties less severe than in the foreign context. 19

Both 18 U.S.C. §1831 and §1832 prohibit activity that is done without authorization, but the term "authorization" is not defined. This raises the specter that disputes between licensees and licensors who have legitimate disagreements about the scope of the license may create criminal risk to the licensee instead of merely civil exposure. 20

Remedies

Criminal Forfeiture: Violators of the EEA are subject not only to the criminal penalties described above, but to forfeiture of any proceeds obtained by the violator, either directly or indirectly, as a result of such violation.21 Even more onerous, however, is the statute's provision that the violator's property used or intended to be used to commit or facilitate the commission of the violation can be seized b the U.S. government22 under procedures followed pursuant to §413 of the Comprehensive Drug Abuse Prevention Control Act of 1970.23

The courts may order such actions as needed to preserve the confidentiality of trade secrets, consistent with the requirements of the Federal Rules of Criminal and Civil Procedure and the Federal Rules of Evidence, and all other applicable laws.24 The Attorney General of the United States, in a civil action, also may seek and obtain appropriate injunctive relief against violation of the EEA, 25 although the statute does not seem to provide any injunctive relief available to private parties who will presumably be required to resort to traditional civil injunctive remedies of state courts.

The statute clearly has a global reach by extending beyond the borders of the United States when the offender is a natural person who is a citizen or permanent resident alien of the United States, or is an organization organized under the laws of the United States, or state or political subdivision thereof. 26 Furthermore, the statute also applies to conduct outside of the United States if an act in furtherance of such conduct was committed inside the United States. 27

Abuses of Federal Forfeiture Statutes: Over the last several years, the courts have been filled with claims of abuses of federal asset forfeiture laws intended to deny drug traffickers both the fruits and tools of their trade. For example, Forbes magazine carried the following account detailing actions of the U.S. government:

Operating on a tip from a confidential informant, agents from the Drug Enforcement Agency seized a newly purchased $400,000 Cessna airplane in Miami in February of 1992. They suspected the aircraft was going to be used for drug transport. In fact, a legitimate Colombian businessman had bought the plane for use in his emerald mining business. He had no involvement whatsoever in the drug trade. But it took him more than two years and $75,000 in legal fees to get the plane back.28

There have been many recent developments in the area of forfeiture that are beyond the scope of this article, but there are some considerations relevant to criminal forfeiture that are somewhat unique when used in the context of trade secrets. The EEA utilizes the procedures set forth in 21 USC §853 29 , which defines the property subject to forfeiture as:

      1. any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of such violation;
      2. any of the person's property used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, such violation. 30

This produces two problems for application to trade secrets. First, trade secrets are frequently used to create improvements or combine with other technology or business information for competitive advantage. Unless the taking of a trade secret results in the replication of that specific isolated product, determining "any proceeds the person obtained, directly or indirectly, as a result of such violation" 31 [emphasis added] will be problematic. Trade secrets, unlike copyrights and patents, are often not clearly identifiable. That is, patents can be identified by their claims, and copyrights come into existence only when they are fixed in a tangible means of expression. Trade secrets, however, can be a procedure or method and might only exist in the minds of those who exercise them. Furthermore, trade secrets can affect more than one product, even products which, when considered as a whole, are totally unrelated. If the trade secret taken in violation of the EEA represents a method of resolving a problem in a single subroutine of a software program, does that mean that all the revenue from the sale of the software is subject to forfeiture?

Second, with the extensive use of computer networks, even beyond those owned by the perpetrator, the use of a single computer in the commission of a violation of the EEA might draw into the purview of the forfeiture provisions equipment and facilities that are located in many different jurisdictions. Section 853 includes property "used" and "intended to be used," "in any manner or part," and property used to "facilitate" violations. The application of such far-reaching definitions has the effect of stifling even lawful behavior because of the risk of devastating consequences from even a seemingly small infraction.

Although the legislative history indicates that Congress did not intend to prosecute use of generic information, the fact that Congress changed earlier versions of the EEA to "trade secret" instead of "proprietary economic information" is of little comfort. 32 There was language removed from a previous version that stated that "knowledge, experience, training or skill that a person lawfully acquires during their work as an employee or independent contractor" would not be included in that which was protected by the statute. 33

Where is the line drawn between generic information and trade secrets? Under the EEA, employees and subsequent employers suffer not only the civil risks associated with such ambiguity, but also criminal exposure.

Americans have long thought that the vibrancy of their economy and the stability of their democracy is in part due to the mobility of the American work force. The EEA may hamper the mobility of employees that has helped fuel American innovation. In fact, the Justice Department recognizes the chilling effect that this statute might have on innocent competition. The U.S. Attorney General has stated that all EEA complaints must be reviewed at the highest levels for the next five years.34 Whether this will be enough to allay fears remains to be seen.

An Aside on Liability

Although software is increasingly controlling our physical environment, from air traffic control software, to nuclear medicine software, to the baggage system at Denver International Airport, many software applications do not exercise such control. In those cases where the harm caused by defective software is to information rather than to person or property, whether that is a database or a financial statement, one of the defenses to a claim for defective software has been the economic loss rule that provides that an individual cannot recover for economic loss (such as lost profits) unless there has been injury to person or property.

In 1990, it was suggested that the previous concepts of information, as something other than property, were breaking down and that there was a growing trend of cases, including two U.S. Supreme Court cases, holding that information was property. 35 Since then, a book has been published, entitled Who Owns Information?, that chronicles the ways information has acquired the same status as property rights.36 Moreover, Colorado passed a statute that declared individuals' DNA to be the property of those to whom it pertains.37

The EEA continues the trend by using traditional property concepts to define the scope of protection when it defines "owner" as "the person or entity in whom or in which rightful legal or equitable title to, . . . the trade secret is reposed."38 [Emphasis added.] Concepts such as "ownership" and "title" in the context of trade secrets continue to expand the view of information as property. The practical result of this transition, in the view of the author, will be to expand the damages that can be sought for defective software.

Conclusion

Congress enacted the Economic Espionage Act of 1996 to prevent conduct that is destructive to an economy increasingly dependent on brain rather than brawn. Whether it will have the effect of encouraging technological development with the consequent economic growth or have the effect of stifling innovation by making people and businesses fearful of interchange will not be known for some time.


1. 18 U.S.C.S. §1831 et seq. (Supp. 1997).
2. Crock and Moore, "Corporate Spies Feel a Sting," Bus. Wk., July 14, 1997, at 77.
3. Farnham, "How Safe are your Secrets? (trade secrets)," Fortune 114 (Sept. 8, 1997).
4. Robbins, "In the New World of Espionage, the Targets are Economic," New York Daily News, Sept. 5, 1994.
5. Crock and Moore, supra, note 2 at 77.
6. Farnham, supra., note 3 at 114.
7. Id.
8. Section 1, 14 U.L.A. 437 (1985).
9. Restatement (Fourth) of Torts, §757 cmt. b (1939).
10. 416 U.S. 470 (1974).
11. Network Telecommunications, Inc. v. Boor-Crepeau, 790 P.2d 901 (Colo.App. 1990).
12. CRS §7-74-102(4).
13. Id.
14. 18 U.S.C.S. §1839(3)(b) (Supp. 1997).
15. 18 U.S.C.S. §1839 (Supp. 1997).
16. See 18 U.S.C.S. §1831(a)(1)-(3) (Supp. 1997), which states:

Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly –

  1. steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;
  2. without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret;
  3. receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization[.]
17 Compare 18 U.S.C.S. §1831(a) (Supp. 1997), with 18 U.S.C.S. §1832(a) (Supp. 1997).
18 18 U.S.C.S. §1832(a) (Supp. 1997).
19 18 U.S.C.S. §1832(a), (b) (Supp. 1997).
20 Mossinghoff, et al., "The Economic Espionage Act: A New Federal Regime of Trade Secret Protection," 79 J. Pat & Trademark Off. Soc'y 191, 199 (1997).
21 18 U.S.C.S. §1834(a)(1) (Supp. 1997).
22 18 U.S.C.S. §1834(a)(2)(Supp. 1997).
23 21 U.S.C.S. §853 (Supp. 1997); 18 U.S.C.S. §1834(b)(Supp. 1997).
24 18 U.S.C.S. §1835 (Supp. 1997).
25 18 U.S.C.S. §1836 (Supp. 1997).
26 18 U.S.C.S. §1837(1) (Supp. 1997).
27 18 U.S.C.S. §1837(2) (Supp. 1997).
28 Adams, "Forfeiting Rights (civil asset forfeiture on the rise)," Forbes 96 (May 20, 1996).
29 21 U.S.C.S. §853 (Supp. 1997).
30 21 U.S.C.S. §853(a)(1),(2) (Supp. 1997).
31 21 U.S.C.S. §853 (a)(1) (Supp. 1997).
32 Mossinghoff, et al., supra, note 20 at 201.
33 Id.
34 Congressional Record (Senate), page S12212.
35 See, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984); Carpenter v. U.S., 484 U.S. 19 (1987).
36 Branscomb, Who Owns Information? (Basic Books, 1994).
37 CRS §10-3-1104.7.
38 18 U.S.C.S. §1839(4) (Supp. 1997).


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