News & Events

Federal Law Provides Enhanced Trade Secret Protection for Employers

Workplace Vol. 2013 No. 3

By: David L. Johnson

djohnsonMost people know that an employee who misuses his employer’s confidential information may be subject to damages in a civil lawsuit.  Many states have enacted a Uniform Trade Secrets Act that allows an employer to pursue a lawsuit against a former employee (or others) who steals its trade secrets – even if the employee did not sign a nondisclosure agreement.  Many people, however, do not realize that, under certain circumstances, such an employee could face criminal prosecution.  This article explains recent changes in the law that provide enhanced rights for employers victimized by trade secret theft.

New federal laws strengthen trade secret protection

Under the Economic Espionage Act of 1996 (“EEA”), certain types of trade secrets theft that impact business across states lines constitute a criminal offense.  Recently, President Obama signed into law two bills that strengthen the EEA and the protection of employer’s trade secrets.  On December 28, 2012, President Obama signed the Theft of Trade Secrets Clarification Act of 2012 (“TTSCA”).  The TTSCA amends the EEA so that it is a criminal offense to intentionally misappropriate a trade secret “that is related to a product or service used in or intended for use in interstate or foreign commerce . . . .”  On January 14, 2013, President Obama signed the Foreign and Economic Espionage Penalty Enhancement Act of 2012 (“FEEPEA”), which increases the penalties for violating the EEA.

In enacting the TTSCA, Congress responded to a decision by a federal court of appeals that overturned the conviction of Sergey Aleynikov, a New York computer programmer.  As an employee of Goldman Sachs & Co. (“Goldman”), Aleynikov helped develop the computer source code for Goldman’s high-frequency securities and commodities trading system.  This top-secret programming enabled Goldman to make split-second market trading decisions.

Although it typically takes several years for a company to develop such a computer program, a start-up competitor of Goldman hired Aleynikov with the expectation that he would create a program within six months.  On the last day of his employment with Goldman, Aleynikov secretly encrypted and uploaded to an overseas server a substantial amount of the source code for Goldman’s trading system.  A short time later, he was caught providing some of this information to his new employer.

Aleynikov was prosecuted and, in 2010, convicted of violating the EEA and sentenced to eight months in prison.  A federal court of appeals, however, reversed his conviction in 2012, finding that Aleynikov technically did not violate the specific language of the then-applicable EEA because Goldman did not sell its computer system in commerce – instead, it just used it.

In direct response to the court’s decision, Congress enacted the TTSCA, which strengthens the EEA and would not allow someone like Aleynikov to get off the hook in the future.  The recently amended EEA not only criminalizes the misappropriation of trade secrets connected with products that are sold in interstate commerce, it also criminalizes the misappropriation of trade secrets that are connected with products or services used in interstate commerce.  Had the TTSCA been in place before Aleynikov left Goldman, his conviction presumably would have remained in place, because Goldman’s trading system was used in interstate commerce (even though it was not sold in interstate commerce).

Stiff penalties for violations of the new trade secret law

The maximum punishment for violating this portion of the EEA is imprisonment of ten years and a $250,000 fine (and $5 Million for an organization).  Under enhanced penalties set forth in the FEEPEA, if a trade secret is intentionally misappropriated for the benefit of a foreign government or agent, an individual perpetrator may be imprisoned for up to fifteen years and fined up to $5 Million (with an organization facing a much higher fine).

The EEA does not address civil penalties that are available to Goldman and other victims of trade secrets misappropriation.  Just because someone like Aleynikov may have escaped criminal penalties does not mean that he or she is completely off the hook.  Instead, a civil lawsuit may be brought by an aggrieved employer against a person and/or company that steals trade secrets.  Under the Tennessee Uniform Trade Secrets Act, an individual who purposely misappropriates trade secrets may be held responsible for twice the victim’s damages, as well as responsible for paying the victim’s attorney’s fees.  Congress has also been considering legislation entitled “The Protecting American Trade Secrets and Innovation Act” that would amend the EEA so as to allow for civil remedies, particularly in the event of international misappropriation.

Bottom line

The enhanced penalties provided by recent amendments to trade secrets law will hopefully deter employees from improperly using their employers’ confidential information during, or after, their employment.  But, to be in a position to avail themselves of remedies for the theft of trade secrets, employers should take measures before the theft occurs so that they can prove that the information is truly “secret.”  Examples of such preventative measures include limiting employee access to a need-to-know basis, keeping sensitive information under lock and key, implementing computer password protections, requiring employees to acknowledge in writing the proprietary nature of certain of the employer’s information, and ensuring that a departing employee returns or destroys all confidential information.  Aggrieved employers should also consistently and aggressively take action against anyone who has stolen trade secrets.  As set forth above, the potential consequences for stealing trade secrets is quite significant.

Navigating trade secret protection is never easy.  If you have any concerns over your proprietary information and other trade secrets, then we recommend that you contact the author of this article or another Butler Snow Labor and Employment attorney for guidance.

 Workplace is published by the Butler Snow Labor and Employment Group. This newsletter focuses on developments in areas such as policy manuals, staffing and employment contracts, compliance matters, employment litigation and labor law.