Cases from Economic Espionage Act

7th Cir.
Judge Posner Upholds Trade Secret Conviction for Theft from Motorola

Hanjuan Jin lost the appeal of her conviction under the Economic Espionage Act for theft of trade secrets. She worked for Motorola from 1998 to 2007, when she was apprehended by customs with $31,000 in her luggage, a one-way ticket to China, and thousands of Motorola documents that she had downloaded. The documents described Motorola’s dated iDEN mobile communications system, which Judge Posner said is still used by “law enforcement, emergency responders, taxicab dispatchers, and the like” as well as “the Israeli and South Korean armed forces.”

Posner upheld her sentence of 48 months and said that she was lucky that the lower court gave her a “surprising break” for “acceptance of responsibility” even though she pled not guilty and went to trial. Posner believes in trade secret protection. He once said, “trade secret protection is an important part of intellectual property, a form of property that is of growing importance to the competitiveness of American industry.” Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 180 (7th Cir. 1991).

Posner criticized the definition of “trade secret” in the Economic Espionage Act (at 18 U.S.C. § 1839(3)(B)) as being an “elaborate” definition that permitted the defendant to challenge whether the documents that she had stolen were in fact trade secrets. He implied that the common law definition (Restatement (Third) of Unfair Competition § 39), which is a single sentence, is better.

In affirming Hanjuan Jin’s conviction, Posner emphasized that “potential value” is sufficient to a finding of trade secrets and that actual value is not a requirement, providing an analogy that may be useful to practitioners: if “a company in New Orleans had stolen the iDEN technology and was about to sell its first subscription to its brand-new iDEN network when Hurricane Katrina destroyed the company,” Motorola would still have experienced harm because Motorola would have had to upgrade its security and its reputation would have been harmed.

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Sixth Circuit Vacates Defendant's Sentencing in Goodyear Trade Secret Theft Case and Remands for Re-evaluation of the Misappropriated Information

In United States v. Clark Alan Roberts and Sean Edward Howley, the United States Court of Appeals for the Sixth Circuit vacated the Eastern District of Tennessee’s sentencing of Roberts and Howley for seven counts related to the theft of trade secrets under the Economic Espionage Act and three counts related to wire fraud.

Roberts and Howley were both employed as engineers for Wkyo Tire Techonology (“Wyko”). Wyo made a deal to supply Chinese tiremaker HaoHua with certain tire-building parts; however, Wyko did not actually know how to create parts. Roberts and Howley leveraged Wyko’s business relationship with Goodyear Tire and Rubber co. (“Goodyear”) to surreptitiously photograph Goodyear's designs for Wyko. Roberts and Howley’s conduct was was in violation of confidentiality agreements both engineers signed with Goodyear, and a federal jury found them guilty on all counts in December, 2012.

The Sixth Circuit upheld Roberts and Howley’s convictions. However, it threw out the District Court’s lenient sentencing. The District Court erred by assigning zero value to the misappropriated trade secrets. Although it was within the District Court’s discretion to disregard the government’s expert's testimony regarding the value of the information under Daubert, it was still required to assign some value to the trade secrets.

The EEA provides guidelines for sentences, which are tied to the value of the misappropriated trade secret. Here, the District Court held the trade secrets had no value, and imposed sentences of four months of home confinement, 150 hours of community service and four years of probation for each defendant. The Sixth Circuit basically instructed the District Court that it could not artificially lower the defendants’ sentences through the “legal fiction” that the trade secrets in question were worthless (which is clearly not the case). As the Circuit Court instructed:

“Yes, all else being equal, an estimate of a substantial loss necessarily will increase the guidelines range, but it will not override the district court’s duty to exercise discretion in deciding what sentences to impose on the defendants, whether within the guidelines range or outside of it.”

U.S. Court of Appeals for the Second Circuit
Second Circuit Affirms Conviction in United States v. Agrawal

On August 1, 2013, the Second Circuit upheld Samarth Agrawal's 2010 conviction under the Economic Espionage Act (EEA). Agrawal, who had been employed as a trader by the French bank Société Générale (SocGen), was charged with delivering SocGen's High Frequency Trading (HFT) system's source code to a rival hedge fund, New York-based Tower Research Capital. On November 19, 2010, a jury found Agrawal guilty on two counts: theft of trade secrets (18 U.S.C. § 1832); and interstate transportation of stolen property (18 U.S.C. § 2314). He was subsequently sentenced to 3 years’ imprisonment, which he is presently serving.

The affirmation was particularly noteworthy considering that just last year, the Second Circuit reversed a conviction in a case with strikingly similar facts. In United States v. Aleynikov, a programmer sold source code to Goldman Sachs' HFT platform to a rival trading firm. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). The Second Circuit distinguished Agrawal from Aleynikov in two ways. First, the court noted that the HFT system in Agrawal was used in interstate commerce, where the HFT system in Aleynikov was not. Second the court noted that where Aleynikov had stolen the HFT source code in intangible form (on a USB memory stick), Agrawal had printed out the code on paper.

In dissent, Judge Pooler took issue with these distinctions, writing, "In order to circumvent Aleynikov, decided just months prior to oral argument in this case, the majority attempts to distinguish the present facts through mischaracterizations, while simultaneously stretching Aleynikov and disregarding the principle of stare decisis."

United States District Court for the Eastern District of Virginia
Department of Justice Brings Criminal Trade Secret Misappropriation Charges Relating to Alleged Theft of DuPont's Kevlar™ Technology

On October 18, 2012, the Department of Justice unsealed an August 21st indictment against Kolon Industries, Inc. and five its executives (“Kolon”) in relation to Kolon’s alleged theft of E.I. du Pont de Nemours and Company’s (“Dupont”) Trade Secrets. The government brought criminal trade secret misappropriation charges pursuant to the Economic Espionage Act, accusing Kolon of engaging in massive industrial espionage over a six-year period in an effort to steal Dupont’s proprietary Kevlar™ technology.

DuPont had previously brought civil charges against Kolon in relation to the same alleged misconduct, which resulted in a damage award of almost $920 million and injunctive relief. In a statement responding to the charges, Kolon’s counsel accused the DOJ of “effectively assist[ing] DuPont in improperly extending [the company’s] monopoly over [Kevlar] technology beyond the limited term provided by the U.S. Patent laws.”

United States District Court for the Northern District of Illinois
Rash of EEA Prosecutions Continues with Indictment of Boeing Engineer Accused of Transmitting Trade Secrets to China

In yet another indictment in the continuing trend of prosecution of trade secret theft under the Economic Espionage Act, the government has indicted Chunlai Yang with two counts of trade secrets theft in the United States District Court for the Northern District of Illinois (Chicago). The government asserts that Yang stole proprietary source code from his employer, CME Group Inc., in order to start his own futures exchange software company. Yang pled not guilty to both counts.

CME brought the case to the U.S. Attorney with evidence that Yang had downloaded over 1,000 source code files from the secure company computer system to his unsecure work computer. Yang then moved the files to his own personal computer. His apparent intent was to use the source code of CME’s own Globex trading system as the backbone for his own company’s system. His company was to be entitled Tongmei Futures Exchange Software Technology Co.

The potential repercussions for Yang are up to 10 years in prison and a $250,000 for each count. In addition, the government seeks to take control over Yang’s computers and other equipment and any proceeds from his actions.

The fact that CME brought the case directly to the U.S. Attorney has been touted by the U.S. Attorney’s office as a good example of corporate and law enforcement cooperation on the protection of trade secrets.

United States Court of Appeals for the Ninth Circuit
9th Circuit: No Competitors Needed for Trade Secrets to Exist Under the EEA

United States v. Chung, 659 F.3d 815, 826 (9th Cir. 2011)
Docket No. 10-50074
Federal Court of Appeals for the 9th Circuit
Decided: September 26, 2011, Judge Susan P. Graber

In a 2011 opinion, the Court of Appeals for the Ninth Circuit affirmed the first trial court conviction under the Economic Espionage Act. Notably, the appellate court in United States v. Dongfan Chung addressed the independent economic value requirement under 18 U.S.C §1839(3)(B) as either actual or potential. In line with the statutory language, the Court asserted that the owner of secret information need not have actual competitors in order to rightfully protect its economic value.

In US v. Chung, the defendant Dongfan “Greg” Chung, a former engineer for the US-contractor Boeing, was found in possession of over 300,000 Boeing documents, including six documents containing Boeing trade secrets. On appeal of his conviction, Chun argued insufficient evidence as to the existence of any Boeing trade secrets within the documents he possessed. The court looked specifically at four Boeing documents relating to a NASA space-shuttle antenna. Judge Graber found that Boeing maintained the secrecy of the particular Boeing information and enacted reasonable protective measures to maintain secrecy. Most notably, the Court endeavored in an extensive analysis of he economic value required for such information to be trade secrets. While the EEA’s definition of trade secret is grounded upon the standard outlined in the Uniform Trade Secrets Act (UTSA), the text of §1839(3)(B) further defines the economic value of trade secret information as either actual or potential, and does not mention the existence of competitors.

The court reasons that such information “could assist a competitor in understanding how Boeing approaches problem-solving and in figuring out how best to bid on a similar project in the future, for example, by underbidding Boeing on tasks at which Boeing appears least efficient.” Thus the Court held Boeing’s secret information independently valuable not for Boeing’s potential use, but for use of such information by any potential Boeing competitor. Thus the Ninth Circuit held that under the EEA, companies need not have actual competitors in order to derive economic value from maintaining the secrecy of certain information.

United States District Court for the Northern District of California
Federal prosecutors indict a state-owned Chinese company and its executive on charges of conspiracy to steal DuPont’s trade secrets

On February 7, 2012, in a rare action, federal prosecutors indicted Pangang Group Limited Company (“Pangang”), a state-owned steel manufacturer in China, and a Pangang executive on charges of conspiracy to steal DuPont’s trade secrets about titanium dioxide technology in violation of the Economic Espionage Act (EEA), 18 U.S.C. §1831 et seq. This indictment supercedes a 2011 indictment in which federal prosecutors originally charged Californians Walter and Christina Liew with witness tampering and making false statements in a federal criminal investigation into the alleged trade secrets theft. DuPont is the world’s largest manufacturer of chloride-route titanium dioxide, a white pigment used in paint, plastics and paper, and defendants allegedly made a “long-running effort” to obtain DuPont’s trade secrets about the process to benefit Chinese companies. Arraignment is scheduled for March 1, 2012.

U.S. District Court California Northern District (San Francisco)
Federal Jury Convicts On Espionage Act Charges Regarding Theft of Oreo Whitening Recipe

On March 5th, 2014, a federal jury convicted Walter Lian-Heen Liew and Maegerle of economic espionage, theft of trade secrets and other charges for theft of a coveted recipe developed by DuPont which is used to whiten the cream inside Oreos. This recipe for titanium dioxide (TiO2), which can also be used for the manufacture of paper and plastic products as well, had been a closely guarded DuPont secret despite longstanding efforts by Chinese to acquire a similar recipe. This process, which uses chloride, is highly regarded as a cleaner and more efficient process than the standard industry practice of using sulfates in the manufacturing process. Historically, DuPont has taken great measures to keep this formula as a trade secret.
According to testimony from trial, Mr. Maegerle, an engineer who had been with DuPont for 35 years, disclosed the recipe to Mr. Liew who had set up a California company with the intention of producing TiO2 and selling it to the Chinese. Mr. Liew had entered into contracts with Chinese state-owned entities regarding projects which involved the use of this TiO2 technology for manufacturing purposes. After obtaining the trade secret, the defendants sold it for over $20 million.
This is the first federal jury conviction under the Espionage Act of 1996 which provides no private cause of action, but offers the government a powerful weapon in protecting intellectual property interests in the U.S. Sentencing for these individuals is scheduled for June 10, 2014 and it will be interesting to follow since there is no precedent.

United States District Court for the Northern District of California
Man sentenced for theft of Trade Secrets from DuPont

Walter Liew was sentenced to 15 years in prison, and fined $28 million following his conviction under the Economic Espionage Act. The conviction arose from the theft of trade secrets from DuPont, particularly information and documents pertaining to the production process of a white pigment, titanium dioxide (TiO2). The pigment is what DuPont uses to achieve its whitest whites in everything from cars to paper.

Judge White, writing in the Northern District of California on a post-conviction motion for acquittal, explained that the evidence demonstrating the intent to injure Dupont, and intent to benefit a foreign government was sufficient for a rational juror to find Liew guilty. It was also noted that the money was tracked to various accounts in Singapore and China, but could not be recovered.

Superior Court of California
TCW and Gundlach settle their dispute over allegedly stolen trade secrets

TCW Group Inc. and Jeffrey Gundlach, its former chief investment officer, announced on Thursday, December 29, 2011, that they had settled a lawsuit over Gundlach’s firing in 2009 and allegations he stole trade secrets to set up his own firm. The terms of the settlement agreement were said to be confidential and the parties would not discuss them. Litigation and damages assessments had not concluded at the time of the settlement, but a jury had previously made preliminary findings.

On August 20, 2011, after seven weeks of trial and two days of deliberation, the California jury in the case between TCW and Jeffrey Gundlach, a former employee, concluded that Mr. Gundlach did technically misappropriate trade secrets and breach his fiduciary duty to the company. But the jury awarded his former employer nothing in damages, finding that Mr. Gundlach’s breach of duty had caused no harm to his former employer. The jury also found that Mr. Gundlach had intentionally interfered with contracts, but that TCW had not been harmed; they awarded no damages on that issue, either.

However, the jury determined TCW had withheld wages from Mr. Gundlach in violation of the state labor code, and found TCW liable to Gundlach for nearly $67 million in back-pay.

TCW may yet recover damages on the trade secrets count; damages for the jury’s finding of misappropriation will be determined by Judge West. TCW is seeking about $89 million for the trade secrets theft. However, the jury’s determination that the theft had not been willful and malicious ruled out an award of punitive damages.

TCW had filed an amended complaint for misappropriation of trade secrets, conspiracy and aiding and abetting in the theft of trade secrets, and common law unfair competition, among other claims, on February 09, 2011. The amended complaint followed a January rejection by Judge West of TCW's claims that the DoubleLine Fund Trust and its trustees had stolen trade secrets and engaged in unfair competition, saying the firm had failed to state a factual basis to support the allegations in its complaint.

TCW's first complaint in this action came nearly a year after the company originally sued Gundlach for breach of fiduciary duty, unfair competition, misappropriation of trade secrets and civil conspiracy, among other claims. Gundlach was TCW's former investment chief who launched DoubleLine Capital LP after being fired from TCW in December 2009.

The second lawsuit targeted a trust associated with Gundlach's investment firm. Like the previous suit, the second complaint claimed that Gundlach worked to steal TCW's data, including contact and holdings data for clients. If printed out, the allegedly stolen information would amount to roughly 9 million pages, according to TCW's suit. The trustees are also named in the second suit based on allegations that they knew that Gundlach and his co-conspirators had stolen confidential, proprietary information from TCW and that DoubleLine would use that material to manage the trust's mutual funds. The complaint included allegations of misappropriation of trade secrets, unfair competition, conspiracy to steal trade secrets, unjust enrichment and other related state law claims.