the following: The CEO of the biotech company you represent has just finished a very
successful presentation to analysts and investors in attendance at an industry conference
highlighting emerging companies. She makes the rounds of the hospitality suites and
appears at the reception desk of one of her customers suites for a meeting later
Not surprisingly, executives of some of the other emerging biotech
companies represented at the conference are in and about the suite. As the receptionist
calls her for her private meeting, your CEO notices (quite innocently) a manila folder
file left behind in an empty seat.
The word Confidential is written on a yellow post-it
note, which is attached to the front of the file. Without thinking about who the file
might belong to, or what its contents may be, your CEO opens the folder. Very quickly, she
discovers shes looking at the strategic market plan and projected inventory data for
one of her companys fiercest competitors.
Or consider this: After seemingly endless months of wooing and
negotiations, a leading engineering executive finally agrees to join your client company
in the capacity of Chief Technology Officer. Although the new CTO was an executive at a
competing firm, you feel confident that the the existing regimen of pre-employment
agreements and policy provisions provided by you to your client will more than adequately
protect your client from allegations of trade secret misappropriation related to the
hiring of the CTO.
Or a condition often experienced by members of a development teams
technical engineering staff: The project manager for your clients customer invites
your clients chief engineer into the customers test laboratory to see a
prototype device being quickly developed to compete with a similar device by rival Company
X. The prototype device sits side-by-side in the lab with the Company X device. The
project manager confides in your chief engineer, stating, Youve been our
preferred supplier and wed like to continue doing business with you. But, as you can
see, the metallic Unobtainium coating on Company Xs product makes it run much more
efficently, with double the product life. If you could just add the coating to your
device, youd probably get similar performance.
Could any of these scenarios be the seeds of federal criminal
With the advent of the Economic Espionage Act of 1996 (EEA), the
answer would be yes with potentially serious consequences for both your client
company and its officers. The purpose of this article is to provide corporate counsel with
some general background as to the history of trade secret jurisprudence, the effect of the
EEA on existing trade secret law, and steps that corporate counsel may take to mitigate
the possibility of corporate and individual liability under the EEA.
The rise of economic espionage
Economic espionage is on the rise, both as a purely domestic matter,
and also as between international parties. For example, a survey released in 1996 by the
American Society for Indus-trial Security showed a 323 percent increase in incidents from
1992 to 1995. The FBI also reported that during the late 1990s, at least 23 foreign
governments were then stealing (or attempting to steal) intellectual assets from U.S.
This trend is not surprising when viewed in the context of recent
historic and technological developments. The end of the Cold War has led governments to
shift the focus of their espionage efforts from military to industrial matters.
Additionally, the rising importance of intellectual property to the
global economy has led to a growing shift from industrial crimes involving tangible
property to those targeting intellectual property.
Finally, the advent of e-mail and the Internet has increased the ease
and speed with which valuable intellectual property assets can be misappropriated.
Put together, these factors suggest that trade secret
misappropriation and associated intellectual property crimes will only continue to grow in
economic magnitude and public visibility.
A brief history
Trade secret law can trace its origins to commercial transactions,
more specifically to the implied duty of good faith that developed at common law in regard
to commercial dealings.
Historically, courts protected the owner of a trade secret when
another party had employed improper means to learn the trade secret, most often holding
that the misappropriator of the secret had breached his duty of good faith
with respect to the commercial relationship. Under early California case law, the
unauthorized use or disclosure of anothers trade secret was normally actionable as a
breach of confidence, as opposed to bring actionable as a violation of a property right.
See, e.g., Riess v. Sanford (1941) 47 Cal.App.2d 244.
Typically, the definition of trade secret at common law
focused narrowly on the nature of the protected information per se. For example, in
Sinclair v. Aquarius Electronics, Inc. (1974) 42 Cal.App.3d 216, the First District Court
of Appeal defined trade secret as:
. . . any formula, pattern, device or compilation or
information which is used in ones business, and which gives him an opportunity to
obtain an advantage over competitors who do not know or use it.
Compare Californias common law definition of trade secret
with that contained within the Restatement (Fourth) of Torts (1939): . . . any
formula, pattern, device, or compilation of information which is used in ones
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. The Restatements definition is arguably narrower than
that at California common law, as it appears to focus more narrowly on technical or
engineering information, as opposed to a broader and more generalized notion of business
The narrow nature of common law definitions of trade secret
failed to address important characteristics of trade secrets which were often an important
point of contention between litigants, such as whether the trade secret should possess
actual and current economic value to be granted protection (as opposed to perceived future
value), or what level of protection a trade secret should be given by its owner for the
courts to recognize the actual existence of a trade secret. As such, the narrow scope of
common law definitions of trade secret often proved less than adequate for
application by the courts to particular cases, or for use by corporate counsel to provide
guidance to clients as to what would or would not constitute trade secret
The Uniform Trade Secrets Act
The promulgation of the Uniform Trade Secrets Act (UTSA) in 1979
attempted to resolve the above-described definitional issues, while at the same time
substantially broadening the definition of what constitutes a trade secret. As
adopted by the California legislature in 1984 and codified at California Civil Code §3426
et. seq., trade secret is defined by the UTSA as:
. . . information, including a formula, pattern, compilation,
program, device, method, technique, or process, that: (a) derives independent economic
value, actual or potential, from not being generally known to the public or to other
persons who can obtain economic value from its disclosure or use; and (b) is the subject
of efforts that are reasonable under the circumstances to maintain its secrecy. Cal.
Civ. Code §3426.1(d).
The UTSA definition broadened the scope of common law trade secret
protections by covering those secrets which may possess only potential value to the
holder, while at the same time narrowing the scope of protection to those trade secrets
for which efforts reasonable under the circumstances had been made by the
holder to protect the secrets confidentiality.
Despite the improvements provided by the UTSA over common-law
formulations of trade secret law, the UTSA approach has proved inadequate in several
important respects. First, the state-by-state approach envisioned by the promulgation of
the UTSA has led to significant distinctions between states in terms of the evolution of
trade secret jurisprudence, as each states judicial interpretation of the UTSA has
been necessarily colored by existing state decisional law. (Although such state-by-state
distinctions are too numerous for analysis within the scope of this article, the authors
recommend the excellent analysis at §1.01 of Milgram, Trade Secrets (1999 edition).
Second, the UTSA failed to define what medium of expression a given
trade secret must take in order to rise to the level of protection envisioned by the UTSA,
as well as to properly evidence the owners intent to maintain confidentiality.
Finally, the UTSA approach had been effectively outstripped by the
above-described historical and technological developments, particularly with respect to
its unsuitability as a tool to discourage and punish economic espionage between
The new federal law
The Economic Espionage Act was signed into law on Oct. 11, 1996, and
is codified at 18 USC §1831 et seq. Section 1831 of the EEA applies to misappropriation
of trade secrets by those intending to benefit any foreign government (which includes
virtually any individual, corporate entity, or government agency acting on behalf of a
foreign government); however, this provision does not require that the trade secret be
related in some way to a product, or that the owner of the trade secret suffer actual
injury. An individual who misappropriates trade secrets under §1831 is subject to a fine
of not more than $500,000 and/or imprisonment of not more than 15 years. 18 USC §1831(a).
An organization that commits such an offense is subject to a fine of not more than $10
Section 1832 prohibits any individual or entity from misappropriating
trade secrets with the intent to convert the trade secret to the economic benefit of
another, or furthering such an act, or attempting or conspiring to do so. Unlike §1831,
§1832 does not require an intent to benefit a foreign government. Further, §1832 is only
limited as protecting trade secrets related to or included in a product that is
produced for or placed in interstate or foreign commerce. However, it must be proved
that it was intended or known that injury to the trade secret owner would occur as a
result of the misappropriation. An individual committing such an offense can be fined
and/or imprisoned for not more than 10 years. 18 USC §1832(a). Any such organization can
be fined not more than $5 million.
Of no small significance, the EEA also contains substantial and
potentially far-reaching forfeiture provisions. In addition to its provisions for
imprisonment and fines, the EEA also requires that the sentencing court shall order
forfeiture to the United States of any property constituting or derived from
proceeds obtained as the result of the violation. 18 USC §1834(a)(1). Section 1834 (a)(2)
further permits the court, in its discretion, to order forfeiture of any
of the persons property used, or intended to be used . . . to commit or facilitate
the commission of such violation, in addition to the proceeds.
The EEAs definition
In contrast to both common law and UTSA-based definitions of trade
secret, the definition offered by the EEA substantially broadens what may constitute
a trade secret. Also unlike the UTSA, the EEA also defines what media of
expression a trade secret may take to in order to fall within the statutes
The EEA defines trade secret as . . . all forms and
types of financial, business, scientific, technical, economic, or engineering information,
including patterns, plans, compilations, program devices, formulas, designs, prototypes,
methods, techniques, processes, procedures, programs, or codes, whether tangible or
intangible, and whether or how stored, compiled, or memorialized physically,
electronically, graphically, photographically, or in writing 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 USC
Two points are worth noting about the breadth of the EEAs
definition of trade secret. The act covers a broad range of information
categories, such as financial and business information; many of these categories do not
fall within most companies traditional view of what constitutes a trade
secret. Additionally, the definitions inclusion of trade secrets . . .
whether tangible or intangible, and whether or how stored, compiled or memorialized . . .
potentially poses significant problems for companies, particularly with respect to the
recruitment and hiring of new employees. Referring back to the second hypothetical
situation above, even the CTOs personal memories and recollections of his prior
employer could arguably raise the specter of criminal liability for his new employer under
As of the date of this article, criminal prosecutions under the EEA
have been few. Through 1999, there had been 11 cases brought under the EEA by the federal
government; six have resulted in guilty pleas. However, the current paucity of enforcement
activity may ultimately prove to be misleading, especially in light of the EEAs
potential impact on civil trade secret misappropriation disputes.
With its specific criminalization of trade secret theft, the advent
of the EEA raises the possibility that trade secret owners contemplating or engaging in
civil litigation over alleged trade secret theft may request the assistance of the federal
government in investigating the alleged theft. Presuming that the government would choose
to intervene, its powers of search and seizure could be indirectly employed to produce
incriminating evidence otherwise subject to civil discovery procedures.
A company which chooses to resist such forced discovery
would arguably run the risk of being charged with criminal obstruction of justice.
Presuming further that a criminal trial results from such an investigation, a trial would
serve to reveal a defendants case strategy, strengths and weaknesses. Moreover, a
conviction pursuant to the higher burden of proof applicable to a criminal trial
proceeding would likely mean the existence of sufficient proof for liability under the
less stringent burden of proof applicable to civil cases.
Indeed, the mere undertaking of a criminal investigation by the
federal government, with its attendant negative publicity, could lead to very serious
consequences for the alleged misappropriator and its relationships with customers,
suppliers, creditors, employees and investors. As such, it would seem that the potential
for criminal indictment under the EEA may induce a party who has misappropriated trade
secrets to settle privately and on favorable terms with the owner of an assorted trade
Minimizing your clients exposure
As described above, the EEA presents a new and potentially potent
force in the context of trade secret litigation. Of course, such litigation most often
arises where actual wrongdoing has occurred; the vast majority of companies act ethically
and responsibly with respect to the care and handling of trade secrets.
However, because of the expansive reach of the EEA, even those companies with outstanding
ethics and compliance practices can find themselves unknowingly exposed to criminal
Scenarios, such as our three examples, that previously would have
been insignificant in the civil litigation context as an inadvertent discovery or
potentially a breach of a confidentiality agreement by a third party, now may result in an
attempt, conspiracy or actual perpetration of an offense under the EEA, if the
confidential nature of information is known and it is used in any commercial manner to the
detriment of the owner.
Criminal liability via the EEA is particularly insidious because it
may arise through many otherwise routine activities of an enterprise, such as hiring
employees or independent contractors, dealing with suppliers or customers, or entering
into new business relationships as either investor or subject of investment.
Any of these activities is a potential touchstone of liability under
the EEA; indeed, as the first hypothetical above suggests, even the seemingly innocent act
of sending employees to an industry conference creates situations which might lead to
liability. Therefore, it is important for companies to be aware of the EEAs
provisions and to protect themselves from EEA liability.
The following list suggests in general terms those actions corporate
counsel should consider taking to protect their clients from EEA liability:
1. Develop and promulgate a written policy that applies the
provisions of the EEA to the specifics of your clients business. At a minimum, the
Outline the basic provisions and
penalties of the EEA;
Give specific examples of where
EEA liability may arise, based upon your clients most frequent business activities;
Provide meaningful advice as to
avoiding EEA liability; and
Advise as to consequences of
intentional disobedience of the policy.
The policy should be incorporated in both your clients employee
handbook and its financial policies and procedures manual. Additionally, the policy should
be the subject of regular training for your clients employees, as well as a subject
matter for your clients internal audit function.
2. With respect to new employees, ensure that an appropriate
employment agreement is signed by the employee at the inception of their employment which
advises them of the existence of the EEA, their duty to abide by its provisions, and the
consequences to their employment for failing to do so. Well-drafted agreements will advise
new employees that they may possess trade secrets of previous employers, and that they are
not to use or disclose such information in connection with their work for your client
3. Individuals retained by your client as independent contractors
(consultants) should also be required to sign an agreement at the inception of their
relationship with your client that is similar to the agreement for new employees, as
described above. In the case of independent contractors, the agreement should also include
provisions that require the contractor to indemnify the client company in cases where
civil EEA liability is derived from the independent contractors acts or omissions.
4. Provisions relating to the EEA should also be included in your
client companys standard contracts for vendors and customers. Well-drafted EEA
provisions will also require a vendor or customer to indemnify your client company where
their actions or omissions have caused the company civil EEA liability.
5. Non-disclosure agreements used by your client at the inception of
potential commercial dealings with another party should be modified to include provisions
covering the EEA, with indemnification provisions if deemed appropriate.
6. The importance of proper marking and handling of documents (as
well as any other tangible medium of record) as proprietary and confidential
must be emphasized to the cli-ents officers and employees, if for no other reason
than the protection offered by the EEA for information which the client has taken
reasonable measures to keep secret.
7. Operating procedures for dealing with customers and competitors
should be established to prevent client personnel from having to guess how to receive and
treat information, with special attention to provisions for a good faith
response if confidential information is inadvertently obtained or received. Such a good
faith response may serve to defeat the intent requirement of the EEA.
8. Finally, be sure you fully understand the corporate structure of
your client, particularly with respect to companies which do a substantial amount of
international business. Countries with emerging or post-Communist economies often require
foreign businesses to form joint ventures or minority-owned subsidiary companies with
internal governmental entities in order to do any business within the country. Such
business forms are a potential wellspring of EEA liability because of the established
legal relationship between your client and a foreign government.
In sum, the EEA is at present a new, little-enforced federal criminal
statute, with little history in terms of either prosecution or litigation. However, the
increasing importance of trade secrets within the global economy make clear that the EEA
will likely become a prominent enforcement tool for the federal government in the near
future. Corporate counsel would be wise to study its provisions and implement compliance
safeguards now, rather than risking the uncertainty of potential criminal liability in the
Russell L. Boltwood is
corporate counsel and human resources director for a California-based telecommunications
equipment provider. Felix L. Fischer is group general counsel and chief patent counsel for