When Trade Secrets Cases Go Criminal: Part 1 by Joshua Robbins and Adam Sechooler

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When Trade Secrets Cases Go Criminal: Part 1 By Joshua Robbins and Adam Sechooler

Law360, New York (June 27, 2017, 11:31 AM EDT) -- Well, that was not in the script.

On May 11, 2017, what had been a high-value, high-profile, but otherwise fairly routine civil trade secrets lawsuit between Uber Technologies Inc. and Alphabet Inc. subsidiary Waymo LLC took a more dramatic turn, when presiding U.S. District Judge William Alsup referred the case to the U.S. Attorney’s Office for criminal investigation of Uber and its key executive Anthony Levandowski. Waymo had presented evidence regarding Levandowski’s copying of trade secrets regarding self-driving car technology from Waymo (his former employer) and transfer of that technology to Uber, and Levandowski invoked the Fifth Amendment to oppose Joshua Robbins production of certain related evidence. In response, Judge Alsup determined that there was reason to believe that both Levandowski and Uber itself may have violated not only civil, but also criminal laws protecting trade secrets. Both now face the prospect of indictment, fines, debarment from federal contract work, and, in Levandowski’s case, prison. Despite the pending criminal investigation, the case continues to speed toward an October trial date. Judge Alsup has refused to stay the case while Uber appeals the denial of its motion to compel arbitration and he recently set an aggressive deposition schedule, including setting Levandowski’s deposition for Aug. 10, 2017. Adam Sechooler Such a criminal referral from the presiding judge is unusual in ordinary trade secrets cases. Indeed, grand juries, federal agents and indictments are not standard fare for the intellectual property specialists, employment counsel and civil litigators who typically handle trade secrets disputes. But they may become more familiar in the years to come, as the U.S. Department of Justice and state prosecutors put increasing emphasis on crimes relating to information technology and IP. And as Uber’s predicament demonstrates, it is not only the thieving ex-employee who may face criminal charges; the company that hires that employee could fall within prosecutors’ sights as well.

While prudent in-house or outside civil counsel will know to contact experienced criminal defense specialists at the first sign of a government investigation, that may actually be too late to fully protect the client’s interests. Criminal investigations involve very different procedural and strategic considerations than ordinary civil disputes, with enormous stakes and potential traps for the unwary. Actions taken before criminal authorities have surfaced can fundamentally affect a company’s or employee’s fortunes in the criminal matter. By the same token, the opening and disclosure of a criminal

investigation can have a profound impact on how the civil lawsuit unfolds. It is thus important for counsel in civil trade secrets litigation to understand at least some of the basic substance and procedure in criminal trade secrets matters, and how both to anticipate whether a particular case is likely to go criminal and to plan accordingly.

This two-part article addresses some of the more important aspects of criminal trade secrets law and procedure, as well as related strategic considerations. This installment provides background on criminal trade secrets laws and discusses the factors that may lead a prosecutor to pursue criminal charges. The second article will discuss how a potential criminal investigation affects a civil trade secrets case and important issues counsel should consider at the outset of the litigation, before learning whether a criminal investigation is afoot.

When Is Misappropriation of Trade Secrets a Crime?

Although wrongful taking of trade secrets is typically addressed through civil litigation, it should be no surprise that it may also be a criminal act. Historically, the tort of conversion — wrongful taking of another’s property — overlapped considerably with crimes such as theft or larceny. The same is true when the property at issue is a trade secret.

The elements of civil liability for misappropriating trade secrets are well-known, and are described in both the Uniform Trade Secrets Act adopted by almost all states[1] and the recently enacted federal Defend Trade Secrets Act. Under both statutes, trade secrets are defined as information that “derives independent economic value” from not being generally known or readily ascertainable by persons who can “obtain economic value from the disclosure or use of the information.” The owner of a trade secret must take reasonable steps to prevent the trade secret from being disclosed. A civil action for trade secret misappropriation may arise when someone improperly acquires, uses or discloses a trade secret. As in the Uber case, trade secret litigation often arises when an employee leaves a company to work for a competitor. A frequent claim is that the employee improperly downloaded documents containing trade secrets from her soon-to-be former employer and gave them to the new company.

The same conduct that gives rise to civil trade secrets liability can also violate criminal laws. The federal Economic Espionage Act makes it a crime to knowingly steal (that is, without authorization, to take, copy, or transmit to others) trade secret information or to conspire with others to do so.[2] The definition of “trade secret” in the EEA is the same as used in the DTSA, and highly similar to that in the UTSA.[3] Penalties can include a prison term of up to 10 years per violation.[4]

Theft of trade secrets is also a state crime. For example, under California Penal Code Section 499c, a person is guilty of theft if he or she steals, obtains through fraud, or copies without authorization a trade secret. Violation of the statute is a felony, punishable by up to three years in prison.

Criminal liability is not limited to departing employees who misappropriate trade secrets; the company that hires them (as well as the executives involved in the hiring) could face charges as well, if it is involved in the theft or if it knowingly makes use of the stolen trade secrets. The EEA makes it illegal to “receive, buy or possess” such stolen material while knowing that it was stolen, or to conspire with others (such as the new hire) to steal or transfer that information.[5] Likewise, the new employer and its executives could be criminally liable if they aid or abet the new hire’s theft or transfer of the technology.[6] Penalties for a company under the statute can range up to the greater of $5 million per offense or three times the value of the stolen trade secret. Moreover, an indictment alone can have serious collateral effects, such as being barred from doing business with federal or state government

programs (e.g., Medicare or the U.S. Department of Defense).[7]

In Uber’s case, Judge Alsup asked the DOJ to investigate the company itself, finding that “the evidence indicates that Uber hired Levandowski even though it knew or should have known that he possessed over 14,000 confidential Waymo files likely containing Waymo’s intellectual property.”[8] Meanwhile, wearable technology company Fitbit is similarly facing a federal criminal investigation stemming from its hiring of employees from competitor Jawbone, which claims the employees took with them thousands of files containing trade secrets.

Theft of trade secrets may also violate other criminal laws. For instance, the federal Computer Fraud and Abuse Act and California Penal Code Section 502 make it a crime to access a computer without authorization in order to wrongfully obtain property or data. Because defendants are frequently alleged to have improperly downloaded proprietary data, these provisions may apply in trade secrets cases.[9]

Under both the EEA and the California Penal Code, a defendant can only be guilty of a trade secrets crime if he or she acts with the requisite specific intent. Under the EEA, the defendant must act “with intent to convert a trade secret ... to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret.” A violation of Penal Code Section 499c requires that the defendant acted “with intent to deprive or withhold the control of a trade secret from its owner, or with an intent to appropriate a trade secret to his or her own use or to the use of another.”

When Do Prosecutors Charge Theft of Trade Secrets?

There are several ways that a trade secret dispute may come to the attention of law enforcement authorities. Referral from a judge in a civil dispute, as in the Uber/Waymo case, is relatively rare. More often, the litigating company that believes its secrets were stolen may refer the case to law enforcement agents (such as the FBI or local police) or directly to a prosecutor’s office, a move that can have benefits and drawbacks, as discussed below. In other cases, agents or prosecutors may learn of the matter through press accounts of the case or (less commonly) by reviewing civil case filings.

Whether prosecutors will decide to pursue a criminal investigation and charges is another matter, one that involves judgment and prosecutorial discretion, and may turn on the specific facts of the case. The U.S. Department of Justice has set out a list of factors that prosecutors should consider in making this decision, including

(a) the scope of the criminal activity, including evidence of involvement by a foreign government, foreign agent or foreign instrumentality; (b) the degree of economic injury to the trade secret owner; (c) the type of trade secret misappropriated; (d) the effectiveness of available civil remedies; and (e) the potential deterrent value of the prosecution.[10]

The first of these factors is perhaps the most important. If there is any indication that the trade secrets were stolen at the request or for the benefit of a foreign government, it is very likely that federal authorities will intervene and open a criminal and national security investigation under 18 U.S.C. § 1831, which carries a heightened potential sentence. The DOJ, FBI, and other agencies often devote substantial resources to such investigations and view them as high-priority cases. Cases involving companies from industries (e.g., defense) and countries (e.g., China) that often feature state ownership

of or involvement in commercial activity are likely to draw particular scrutiny.

In other cases, prosecutors and investigators would consider the egregiousness and sophistication of the conduct. Where the theft and distribution of the trade secret involved numerous individuals acting in concert — perhaps including both employees of the victim company and executives from its competitor — the case may have greater law enforcement appeal. Likewise, where there is strong evidence of consciousness of guilt, such as elaborate efforts to conceal the taking of the trade secrets, the case may be a candidate for prosecution.

The third factor listed above — the type of trade secret misappropriated — bears particular consideration. For example, while a customer list may qualify as a trade secret, and the theft of such lists is often at issue in civil cases, it can be more problematic in the context of a criminal prosecution. For example, a defendant might object that the list is not really a trade secret because it is readily ascertainable by outsiders and was compiled merely through general marketing efforts.[11] If the issue is close enough to raise a reasonable doubt, it would discourage prosecutors from seeking charges, and possibly from even opening an investigation. Thus, prosecutors often choose to focus on cases involving theft of product specifications, formulae or other highly technical information that is more clearly the product of internal research and development and could not be deemed publicly available.

More generally, in practical terms, prosecutors often look for trade secrets cases with strong, compelling evidence on all elements — including intent — and with no close calls or gray areas. At least at the federal level, prosecutors tend not to charge cases unless they believe they have proof beyond a reasonable doubt as to every key point. Certain issues in trade secrets cases, such as whether the information in question is really secret or whether its owner took reasonable measures to keep it confidential, are often heavily litigated, and feature facts cutting in both directions. Because the standard of proof is so much higher for criminal charges, evidence that may suffice in a civil case at summary judgment, or even at trial, may be insufficient to support criminal charges.

Along the same lines, prosecutors will also consider the availability of common defenses to criminal trade secrets charges. For example, in United States v. Shiah,[12] the defendant was accused of copying electronic documents containing trade secrets shortly before leaving his company for a competitor. His explanation — that he had only copied and kept the information for general reference purposes, and did not intend to use any of the confidential items in his new job — was deemed just credible enough by the court (in a bench trial) to result in an acquittal, although the judge indicated that the evidence would have supported liability had it been a civil case. As a result, federal prosecutors considering trade secrets matters will often look to whether such an explanation might be available and plausible. The DOJ’s official guidance cites the case in emphasizing “the importance of developing evidence of intent to convert.”[13]

Joshua M. Robbins is a partner in the Los Angeles and Costa Mesa, California, offices of Greenberg Gross LLP and a former federal prosecutor. He was the computer and intellectual property crime coordinator for the Southern Division of the U.S. Attorney’s Office for the Central District of California.

Adam M. Sechooler is an associate in the firm's Costa Mesa office, and a lecturer on trade secrets law at the University of California's Irvine School of Law.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general

information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., California Civil Code § 3426 et seq.

[2] 18 U.S.C. §§ 1831-1832.

[3] Compare 18 U.S.C. § 1839(3) with UTSA, Section I(4).

[4] If the theft is intended to benefit a foreign government, the prison sentence can be up to 15 years per violation.

[5] See, e.g., 18 U.S.C. § 1832(a)(3).

[6] 18 U.S.C. §§ 2.

[7] See 48 CFR 9.407-2 (government may suspend government contractor “upon adequate evidence of ... theft ... or receiving stolen property”; “indictment for any of the[se] causes ... constitutes adequate evidence for suspension”).

[8] See Waymo LLC v. Uber Technologies, Inc., No. C-17-00939-WHA (N.D.Cal.), Order Granting in Part and Denying in Part Plaintiff’s Motion for Provisional Relief, May 15, 2017, at 17.

[9] See United States v. Nosal, 828 F.3d 865 (9th Cir. 2016) (affirming conviction under Computer Fraud and Abuse Act of ex-employee who used remaining employee’s username and password to login to employer’s network and steal trade secret information).

[10] See U.S. Attorney’s Manual, available at https://www.justice.gov/usam/usam-9-59000- economicespionage. Other factors DOJ has cited include (1) whether the trade secrets involve critical technologies with military or other sensitive applications; (2) the amount of illegitimate profit the defendant obtained through the theft; (3) whether the victim or victims took reasonable measures to protect against the crime; (4) whether the defendant led others in committing the offense; (5) the defendant’s criminal history; and (6) whether the defendant is subject to prosecution in another jurisdiction. See Cristopher S. Merriam and Kendra R. Ervin, Deciding When to Prosecute an Intellectual Property Case, in United States Attorneys’ Bulletin (January 2016), 8-13.

[11] See U.S. Department of Justice – Computer Crime and Intellectual Property Section, Prosecuting Intellectual Property Crimes Manual (4th ed. 2013) 168-169 (citing ATC Distribution Group v. Whatever It Takes Transmissions & Parts, 402 F.3d 700, 714-15 (6th Cir. 2005); Nalco Chem. Co. v. Hydro Techs., Inc., 984 F.2d 801, 804 (7th Cir. 1993); Standard Register Co. v. Cleaver, 30 F. Supp. 2d 1084, 1095 (N.D. Ind. 1998)).

[12] SA CR 06-92 (C.D. Cal. Feb. 19, 2008).

[13] U.S. Department of Justice – Computer Crime and Intellectual Property Section, Prosecuting Intellectual Property Crimes Manual (4th ed. 2013) 192-193.