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
Summary of Parties and Facts
Defendant Dongfan “Greg” Chung was born in China in 1936 and became a naturalized citizen of the United States in 1972. Chung worked on space shuttle components as a civil engineer at either Boeing or Rockwell (Boeing’s acquired space division) until his retirement in 2002. The defendant later returned to Boeing in 2003 as a contractor, and remained as such until 2006. Boeing maintains a defense contract – relationship with the United States, and NASA specifically.
United States federal agents first suspected Chung of espionage during an unrelated investigation of an individual named Chi Mak, a former naval engineer for a US defense contractor similar to Boeing. While Mak would ultimately be convicted of acting as an unregistered foreign agent in 2007, a previous FBI-conducted search of Chi Mak’s house in 2005 found (1) an address book with Greg Chung’s contact information, (2) a series of letters between defendant Greg Chung and Chen Quinan, the project manager of the china National Aero Technology Import/Export Corporation, and (3) a list of tasks addressed to the defendant, from the Nanchang Aircraft Company in China. Prompted by this evidence, federal agents commenced surveillance and trash searches at Greg Chung’s home and found Boeing documents in the trash, hidden in the pages of Chinese-language newspapers. On September 11, 2006 FBI agents interviewed the defendant and searched his home on consent, and found several inculpatory documents including a detailed journal describing Chung’s travel for meetings and “espionage activities” in China, as well as approximately 300,000 pages of Boeing documents related to Boeing space vehicles, helicopters, fighter jets, and thermal protection systems stored in binders. After the search Chung told federal agents that he (1) had permission from his employer to possess the documents, and (2) took the documents because he planned to write a book. Both of these statements were later proven false. Of the 300,000 pages of Boeing documents found in the defendant’s home, the United States government identified six (6) documents that allegedly contained Boeing trade secrets. Four of the six pages related to a Boeing ‘phased ray antenna,’ and two pages refer to the technology that Boeing developed for its Delta IV Rocket. This evidence led to a federal indictment of six counts of economic espionage against defendant Dongfan Chung.
California Central District Court
Greg Chung was charged by the United States for criminal theft of trade secrets in violation of the Economic Espionage Act of 1996 (“EEA”), which provides in pertinent part:
“Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly… (3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained or converted without authorization… shall be fined not more than $500,000.00, or imprisoned not more than 15 years, or both.”
After a bench trial, the California Central District Court found that the defendant’s possession of Boeing proprietary documents constituted an intentional theft of trade secrets under the EEA. The Court was not persuaded by Chung’s defense attacking the Constitutionality of the EEA charges, or that he lacked knowledge sufficient to support the statute’s mens rea. The lower court points to several facts to demonstrate Chung’s constructive knowledge of the secret or proprietary nature of the documents he procured, concluding that “a defendant charged with economic espionage will necessarily have some understanding of the measures that have been taken to protect the information he possesses.” In addition to six counts of economic espionage, Chung was convicted of one count of conspiracy to commit economic espionage, one count of acting as an unregistered foreign agent, and one count of making a false statement to a federal agent. Notably, in 2008 Greg Chung was the first conviction under the EEA, and he was subsequently sentenced to 188 months in prison. Chung subsequently appealed, challenging all counts of his conviction for lack of sufficient evidence.
Ninth Circuit Appellate Court Opinion
The Ninth Circuit began its review of the relevant trade secrets issues by first highlighting the pertinent five-year statute of limitations under the EEA . Although the defendant’s activities and correspondence prior to February 6, 2003 were rightfully excluded, the Ninth Circuit included two significant pieces of evidence, namely (1) the FBI’s 2006 discovery of over 300,000 pages of Boeing documents in Chung’s possession, and (2) that Chung’s hid and disposed of over 1,000 pages of Boeing documents between the pages of old newspaper. As these activities took place within the statute of limitations period, the six documents deemed Boeing trade secrets in the defendant’s possession were held admissible, and the court turned to analyze the US trade secret claims against Chung under the Economic Espionage Act.
Next, the opinion identified a key feature of the definition of “trade secret” under the EEA, namely that the owner has (1) taken reasonable measures to keep the information secret, and (2) “derives independent economic value, actual or potential, from not being… readily ascertainable through proper means by the public.” By this definition, the prosecution has the burden to prove three elements under the EEA: (1) that the information is actually secret because it is neither known to nor readily ascertainable to the public; (2) that the owner took reasonable measures to maintain that secrecy; and (3) that independent economic value is derived from that secrecy. This standard echoes the definition of trade secrets set out in the Unified Trade Secrets Act (UTSA), which rejects the requirement that a trade secret be “in use” to retain economic value as such. . This is a key feature of the Economic Espionage Act and would prove pivotal for the Ninth Circuit in Chung’s appeal.
After these preliminaries, Judge Graber addressed the defendant’s challenges to the sufficiency of the prosecution’s evidence. In particular, Chung challenged the trade secret status of four of the Boeing documents in his possession that related to a Boeing “phased array antenna.” The court initiated a brief analysis of the secrecy and the reasonable measures taken to protect the secrecy of the Boeing “phased array antenna.” The court held there was ample evidence to satisfy both elements. For example, although documents containing similar information were presented by Boeing engineers to competitors at a NASA-sponsored conference, the court held that key portions of a number of antenna elements were kept secret by Boeing and not disclosed at that conference, or at any later time. Further, the court held Boeing’s general physical security measures at its plant, employee confidentiality agreements, and reserving the right to search personnel belongings and vehicles combined were sufficient to support the conclusion that Boeing took adequate reasonable measures to keep all four phased array antenna documents secret.
Finally, the court turned to the third, “independent economic value” element of the EEA. In considering independent economic value, the majority notes that courts will most often consider “the degree to which the secret information confers a competitive advantage on its owner.” Cost and effort necessary to develop the secret information may also be of consideration, but the majority explicitly defines independent economic value as a “fact-intensive inquiry.” Importantly, the court weighed two central facts that outline the framework of the defendant’s claims on appeal. First, although Boeing did compete with other companies for NASA contracts, at the time Boeing was the “sole-source contractor… for integrating technologies, including the new antenna,” into its space shuttle. Further, the Boeing phased array antenna was ultimately omitted from NASA’s space shuttle designs, and therein Boeing’s secret information was never actually in use. Thus, Chung argued that the information was of little value to Boeing because the designs were never implemented, so Boeing could not claim its independent economic value. The defendant further asserted that such Boeing information would be of even less value to third parties, as the Boeing contract effectively stopped NASA from accepting competitor contracts at the time, and therein do not constitute trade secrets.
Importantly, the EEA statute language plainly states that the independent economic value of trade secret information may be actual or potential. The Ninth Circuit supports the EEA statutory language by considering and accepting Boeing’s evidence of potential value of Boeing’s phased-array antenna information. Here, the majority cited testimony from Boeing’s expert witnesses, asserting that estimates of hours tied to the list of tasks could tip off competitors to more than just the costs associated with a phased ray antenna. The court continued:
“The reasonable inference is that the 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.”
The Court suggested that Boeing’s information was inherently valuable, in that its potential use offers an economic advantage to any competing company seeking to gain potential share of the marketplace. The economic advantage of Boeing’s secret information lies in knowing how Boeing accomplishes its work, including engineering and other processes that could potentially reveal Boeing’s relative costs. An analysis of this Boeing information could offer a distinct advantage to a potential Boeing competitor bidding against Boeing for integration work when the “sole-source” contractual relationship is terminated, or to undercut Boeing’s bids on tasks where Boeing seems inefficient. A competitive maneuver stemming from an unauthorized use of Boeing’s proprietary information would confer an unfair economic advantage upon any Boeing competitor.
Importantly, the Ninth Circuit is suggesting that the existence of actual competitors is irrelevant. Instead, economic value of secret information may reasonably be inferred given the potential for competitors to emerge in existing markets. Thus, the court concluded that Boeing derived economic value from keeping secret the information from potential competitors, sufficient to constitute possession of Boeing trade secrets during the limitations period. Lastly, the Ninth Circuit looked briefly to the mens rea required under the EEA, and determined that Chung intended to give Boeing trade secrets to benefit Chinese nationals by providing technical information responsive to requests from Chinese officials. Accordingly, the court affirmed all counts of Chung’s conviction under the EEA.
The socio-economic policies underlying the Economic Espionage Act seek to redress the inequity that would result given such an unauthorized use of information like Boeing’s phase array antenna documents. Importantly, the Ninth Circuit’s opinion highlights the domestic and international policy interests in deterring the under-cutting of competitors through improper means. The capitalist American economy encourages increased access for competitors into new and existing markets. The Ninth Circuit’s holding bolsters this ideology in holding that the EEA seeks to protect trade secret information from unauthorized use by both actual and potential competitors. This point is particularly salient in international economic espionage, as countries seeking trade-secret information may not yet be a competitor in an existing market, but may instead be seeking such information for later potential competitive use. Government exploration and discovery may yield certain classified information that would qualify as trade secrets, and yet be purposefully kept secret for national security or purposes. In this light, the Ninth Circuit’s use Boeing expert testimony to carefully frame the economic value component of trade secret information under the EEA as potential serves to encompass the breadth of possible espionage activity intended to be protected under the statute. Ultimately, there seems little significance in any distinction that secret information is economically valuable for entities with competitors, but not so for those without. In a free-market economy like the United States, a potential competitor could easily emerge in any market and would stand to benefit from such trade secret information.
Further, the Ninth Circuit’s holding also denies the likelihood for a similarly situated defendant to successfully raise the defense of lack of trade secret because the plaintiff is uncontested in its current market, or has yet to make commercial use of its secret information. Interestingly, this reasoning may also suggest that information need not be used in commerce, and could still retain independent economic value sufficient for a trade secret under the EEA. If Congress’ authority to promulgate the EEA is grounded in the Commerce Clause of the Constitution , in theory the US could not have standing to bring a claim under the EEA concerning any information not in use, being outside the “stream of interstate commerce.” While §1832 of the EEA requires trade secret information be produced for or placed in interstate commerce, only a §1831(a) claim is brought against Chung in the present action. This provision of the EEA makes no reference to any requirement that information be used within the stream of commerce. Even if such a requirement were implied, this constitutional argument would also fail because Boeing’s information and design was created within the commercial contractual relationship between Boeing and NASA. Such contractual relationships foster the growth of technology and information intended for protection under the Economic Espionage Act of 1996. In this way, the Ninth Circuit’s assessment of independent economic value of secret information as potential or actual under the EEA serves to perpetuate a sense of equity within American free-market capitalism, and deter international theft of US trade secrets in the global economy.