IRS Executive Compensation Audit Program
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IRS Executive Compensation Audit Program

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4 Pages
English

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This Article was Originally Published in North Carolina Lawyers Weekly, March 13, 2006 The Economic Espionage Act – Is It Finally Catching On? by Press Millen & Todd Sullivan The drumbeat is still faint, but might be getting steadier. In Ohio, a former employee of a hydraulic gear pump manufacturer pleads guilty to selling his former employer’s trade secrets to a South African competitor. Last month, a Connecticut man received two years in federal prison for stealing the source code for Microsoft’s Windows NT 4.0 and Windows 2000 and then offering to sell it on the Internet. An FBI sting operation nabbed him. An executive of a California company pleads guilty to taking his former company’s engineering notes in hopes that it will boost his success in his new job. The Economic Espionage Act In each case the prosecutions proceeded in federal court under the Economic Espionage Act, 18 U.S.C. § 1831, et seq. (the “EEA”), a federal law passed in 1996 to facilitate criminal prosecutions for theft of trade secrets. The EEA created two related crimes. The first, set forth in 18 U.S.C. § 1831, created a new federal crime for stealing trade secrets for the benefit of foreign governments, instrumentalities and agents. The new crime recognized that in the post-Cold War world, competition between the United States and its enemies was no longer just ideological but now contained a significant economic element. ...

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This Article was Originally Published in
North Carolina Lawyers Weekly
, March 13, 2006
The Economic Espionage Act – Is It Finally Catching On?
by Press Millen & Todd Sullivan
The drumbeat is still faint, but might be getting steadier.
In Ohio, a former employee of a
hydraulic gear pump manufacturer pleads guilty to selling his former employer’s trade secrets to
a South African competitor.
Last month, a Connecticut man received two years in federal prison
for stealing the source code for Microsoft’s Windows NT 4.0 and Windows 2000 and then
offering to sell it on the Internet.
An FBI sting operation nabbed him.
An executive of a
California company pleads guilty to taking his former company’s engineering notes in hopes that
it will boost his success in his new job.
The Economic Espionage Act
In each case the prosecutions proceeded in federal court under the Economic Espionage Act, 18
U.S.C. § 1831,
et seq.
(the “EEA”), a federal law passed in 1996 to facilitate criminal
prosecutions for theft of trade secrets.
The EEA created two related crimes.
The first, set forth in 18 U.S.C. § 1831, created a new
federal crime for stealing trade secrets for the benefit of foreign governments, instrumentalities
and agents.
The new crime recognized that in the post-Cold War world, competition between the
United States and its enemies was no longer just ideological but now contained a significant
economic element.
Under the statute, violators can be imprisoned for up to 15 years and receive
fines of up to $500,000.
Organizations committing offenses can be fined up to $10 million.
The second new crime under the EEA does not require that the theft of the trade secrets have a
foreign connection.
Instead, any attempt to convert a trade secret “related to or included in a
product that is produced for or placed in interstate or foreign commerce” that injures the owner
of the trade secret is a crime punishable by up to ten years in prison.
18 U.S.C. § 1832 (a).
Fines for organizations committing this crime can range as high as $5 million.
In addition to fines and imprisonment, the EEA provides for criminal forfeiture of any property
“constituting or derived from” any violation or proceeds of the violation.
Companies who hire
persons in order to get improper access to another company’s trade secrets can find themselves
criminally liable under the EEA and subject to the significant consequences of federal
prosecution.
CLIENT ALERT
March 13, 2006
Under the EEA, trade secrets are defined in a manner at least as broad as the definition of trade
secrets found in statutory regimes enacted under state laws based on the Uniform Trade Secrets
Act.
A “trade secret,” as defined by the EEA, “means all forms and types of financial, business,
scientific, technical, economic, or engineering information,” so long as the owner has taken
reasonable measures to keep the information secret and the information derives independent
economic value “from not being generally known to, and not being readily ascertainable through
proper means by, the public.”
18 U.S.C. § 1839(1).
The EEA has the potential to be a powerful tool in protecting the trade secrets of American
companies.
After a decade on the books, though, is it fulfilling that role?
EEA Prosecutions
The United States Department of Justice has recently published new cybercrime statistics
detailing prosecutions under the EEA.
From 2000 through the end of 2005, federal prosecutors
brought 34 cases under the EEA.
Of that number, nearly half (15) were filed in the Northern
District of California, home to Silicon Valley.
That's five times the number of the next most
prolific district, the Southern District of New York with only three cases.
Only three other
districts – the Western District of New York, the Southern District of Florida, and the Central
District of California – had multiple cases (two each) over the six-year period.
Nine districts had
one case each.
Thus, the Justice Department statistics show that 86 federal judicial districts – over four-fifths of
the districts in the county – had
no
EEA prosecutions during the period.
No prosecutions were
brought in the three North Carolina districts.
While in some cases businesses in those districts
might not have had many trade secrets worth stealing, it's more likely that prosecutors simply
weren't comfortable proceeding under a relatively novel federal statute.
Similarly, many
businesses (and their attorneys) might not even be aware of the existence of a federal statute
designed to protect their trade secrets.
Surely, an economy as advanced as North Carolina’s has
trade secrets not only worth stealing, but has trade secrets that have been stolen.
More Details on the Prosecutions
The Justice Department data also describes the categories of trade secrets at issue in the criminal
cases that the government has brought.
The range of trade secrets is wide.
As noted above, it
includes things like source code for software and engineering drawings and blueprints.
It also
includes more unusual trade secrets such as genetic screening discoveries, DNA cell lines, and
drug delivery formulas.
Perhaps most interesting are the various categories of internal company
competitive information that have been the subject of prosecutions.
These include customer
information, proprietary pricing information, internal project information, and even access card
control information.
Also interesting are the classifications of the individuals indicted.
The largest categories were
ex-employees and competitors (and sometimes a combination of the two).
However, company
CLIENT ALERT
March 13, 2006
insiders were also indicted in a number of cases.
Fines and forfeitures range from $10,000 to
nearly $150,000.
Courts handed out jail sentences as long as five years.
Protecting Trade Secrets Through Prosecutions
In seeking protections under the EEA, the most salient factor for companies to understand is that
the EEA is a
criminal
statute.
Every federal court which has considered the issue – all in
unpublished decisions – has held that the statute provides no private right of action.
Most
recently, for example, Senior Judge Haight in the Southern District of New York held that
congressional intent “articulated in the text of the EEA as well as the legislative record,”
“expressly and unambiguously demonstrates that Congress did not establish a private cause of
action in the EEA.”
Cooper Square Realty Inc. v. Jensen
, slip op. (S.D.N.Y. Jan. 10, 2005).
Thus, companies will first have to convince the FBI to investigate a case and then show a federal
prosecutor that their case is worthy of criminal prosecution.
As a general rule, U.S. Attorneys’
offices are not set up to prosecute violations of the EEA in the same manner in which, for
example, they routinely prosecute drug or gun crimes.
Not only that, federal regulations require
that EEA prosecutions be cleared by the Justice Department in Washington.
Specifically,
prosecutions for foreign-related thefts must be approved by Computer Crime and Intellectual
Property Section of the Criminal Division, while domestic-only cases must be approved by the
Internal Security Section before indictments may issue.
Moreover, as even the Justice Department’s Internal Intellectual Property Manual notes,
“[v]ictims of trade secret thefts are often faced with a dilemma when deciding whether to report
the matter to law enforcement authorities.”
While companies don’t want perpetrators to go
unpunished, they are often “concerned that if they report the matter, the trade secret will be
disclosed during discovery or during the criminal trial.”
In order to encourage reporting,
Congress sought to preserve the confidentiality of trade secrets by mandating that courts "shall
enter such orders and take such action as may be necessary and appropriate to preserve the
confidentiality of trade secrets, consistent with the requirements of the Federal Rules of Criminal
and Civil Procedure, the Federal Rules of Evidence, and all other applicable laws."
18 U.S.C. §
1835.
Nevertheless, federal authorities cannot guarantee that trade secrets will remain
confidential during prosecutions.
Equally difficult may be convincing prosecutors that they can satisfy that a given company
“secret” – almost always a piece of intangible property – can in fact meet the statutory definition
of a trade secret.
That means showing that it is a secret, subject to reasonable measures to
maintain its secrecy, not readily ascertainable through proper means, and deriving economic
value from its secrecy.
As a practical matter, a U.S. Attorney’s office may take some convincing
before bringing a prosecution.
To summarize, the EEA is a powerful tool for federal prosecutors and potentially a great boon to
companies owning trade secrets.
The objective data, however, indicates that at least in most
judicial districts it may not be used to its greatest extent.
While prosecutions may continue to
CLIENT ALERT
March 13, 2006
increase in coming years, companies will need to work hard to make sure their trade secrets are
protected and to convince prosecutors to go to bat for those trade secrets.
Womble Carlyle client alerts are intended to provide general information about significant
legal developments and should not be construed as legal advice regarding any specific facts
and circumstances, nor should they be construed as advertisements for legal services.
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we
inform you that any U.S. tax advice contained in this communication (or in any attachment) is not
intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under
the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any
transaction or matter addressed in this communication (or in any attachment).
Press Millen
is a trial lawyer and
Todd Sullivan
a labor and employment lawyer in the Raleigh
office of Womble Carlyle Sandridge & Rice, PLLC.
They are also the founders of the Womble
Trade Secrets Blog found at
wombletradesecrets.blogspot.com
.