Economic Espionage Act: Seven Tips to Close a Fast-Growing Compliance Gap
By Lauren M. Papenhausen and Benjamin Franklin, McDermott Will & Emery LLP
The little known and often ignored Economic Espionage Act has lain relatively dormant since its passage 16 years ago, but it has gotten a quadruple adrenaline shot in the past few months. This suggests that companies will soon see a surge in the federal government’s EEA enforcement efforts.
While most sophisticated corporations, particularly those with multinational operations, have put significant effort into compliance programs addressing bribery (i.e., the Foreign Corrupt Practices Act), antitrust, and other risks, almost none has made EEA compliance a priority. Most will be woefully unprepared for the new era of EEA investigations—an era that carries with it an increased risk of criminal convictions, prison time for executives, and devastating financial penalties.
The EEA, a criminal statute passed in 1996, punishes the knowing possession of stolen trade secrets. Any theft of trade secrets can lead to an EEA prosecution, though increased penalties apply for trade secrets that are obtained with an intent to benefit a foreign government, foreign agent, or foreign instrumentality.
The EEA has a broad reach, covering:
- conduct occurring in the United States;
- conduct by a citizen of the United States or a corporation organized under U.S. laws, even if such conduct occurs abroad; and
- a conspiracy or other violation in which a conspirator committed at least one act in furtherance of the offense in the United States.
The government likely will take the position that the act in furtherance of the offense could be as minor as an email to a recipient in the United States or a wire transfer that passes through a U.S. bank.
Why Be Concerned?
Four major recent developments suggest that the risks associated with potential EEA enforcement will increase substantially in the next several years.
First, the government unsealed a significant indictment in October against Korean manufacturer Kolon Industries Inc., seeking a criminal forfeiture of more than $225 million.1 This requested forfeiture represents the entire gross proceeds of the sale of Kolon’s Heracron product, a Kevlar competitor that allegedly incorporated trade secrets stolen from DuPont. The Kolon indictment presages increased government interest in bringing criminal charges under the EEA against corporate defendants in addition to individuals. It also demonstrates the enormity of potential penalties for violating the EEA.
Two other key developments over the past few months include two new federal laws designed to strengthen the EEA. The Theft of Trade Secrets Clarification Act of 2012,2 signed into law in December, expands the EEA to cover trade secrets relating to products and services a company uses internally, rather than merely products sold in interstate or foreign commerce. The Foreign and Economic Espionage Penalty Enhancement Act of 2012,3 signed into law in January, increases the maximum penalties for the theft of trade secrets with an intent to benefit a foreign government or instrumentality. For organizations, the maximum fine—which would be in addition to any criminal forfeiture such as the $225 million referenced above—is now either $10 million or three times the value to the organization of the stolen trade secret. These two amendments to the EEA—both of which passed overwhelmingly—reflect heightened congressional interest in preventing thefts of trade secrets that damage American industry. Such congressional interest undoubtedly will find an outlet in the Department of Justice.
The fourth major indicator of an escalating government interest in EEA prosecutions is the “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets,” which the White House announced Feb. 20.4 This strategy, prepared in collaboration with several U.S. government entities, reflects a broad policy interest across the government in strengthening U.S. response to thefts of trade secrets that harm U.S. industry. The strategy outlines five “action items”:
- using American economic might to increase diplomatic pressure for other nations to step up their enforcement against trade secret theft;
- promoting voluntary best practices by the private sector to protect trade secrets;
- increasing U.S. law enforcement efforts to combat violations of the EEA;
- further strengthening U.S. legislation to address the theft of trade secrets; and
- improving public awareness of the detrimental effects of misappropriation of trade secrets.5
Notably, the strategy states that investigation and prosecution of trade secret theft will be a “top priority” for DOJ.6 The strategy also touts an increase of 29 percent in FBI trade secret theft investigations since the establishment of the Attorney General’s Task Force on Intellectual Property in 2010.7 Since 2010, there has been a series of DOJ grants designed to spur investigations of trade secret theft. The recently unveiled administration strategy strongly suggests that these grants, and the accompanying increase in investigations, will continue and, more likely, increase.
Faced with the likelihood of increased EEA enforcement in the coming years, there are several inexpensive, concrete steps companies can take to protect themselves.
Tip No. 1: Train Management
On Receipt of Competitors’ Trade Secrets
To minimize corporate exposure for an EEA violation, and personal liability for individual members of management, managers and executives must be able to identify a potential EEA violation and must know how to react appropriately. To that end, management should receive training on the core concepts of the EEA, and companies should provide clear directions on who in the compliance and legal departments can provide assistance if managers suspect an EEA violation. In United States v. Malhotra,8 for example, the former employee of a competitor company sent a document containing trade secrets to two executives of his new employer. At least one of the executives made the company aware of the impropriety, and the company accordingly conducted an internal investigation, fired the employee, and notified the government of the violation. This sort of prompt and decisive action is what is necessary to avoid criminal liability for the company and its executives—as was done in Malhotra. But managers cannot be expected to respond appropriately unless they are attuned to the issues and risks.
Tip No. 2: Create Employment Policies
About Theft or Use of Others’ Trade Secrets
While managers must have a more detailed understanding of the EEA, all employees should receive basic information on the theft of trade secrets. Establishing clear guidelines for what constitutes a trade secret and providing this information in an employee handbook or mandatory training is a excellent step toward educating all personnel. In addition to education on trade secrets, employees should be made aware that the use of stolen trade secrets (whether from their employer or from a competitor) is a violation of the law, a violation of the company code of conduct, and a violation of their employment contracts. These steps send a clear message that the company is not interested in stolen trade secrets and that employees who illegally obtain trade secrets will be disciplined, including termination, rather than rewarded. This message should be heard from the factory floor up to the executive suite.
Tip No. 3: Include EEA
Compliance in M&A Due Diligence
It may be possible to inadvertently purchase an EEA violation as part of an acquisition. Much like an FCPA violation, the government may take the view that a parent company is responsible for the EEA violations of a newly acquired subsidiary. Therefore, during the due diligence process, an acquiring company should, for example, investigate:
- any prior or ongoing civil trade secrets lawsuits (which often precede a criminal indictment, as was the case in Kolon);
- evidence of “consultants” who are former employees of competitor companies; and
- any sudden development of products that typically require a lengthy research and development period.
Companies should be especially cautious when entering into partnerships or other agreements with state-owned companies, which are commonplace in China and elsewhere, as the misappropriation of trade secrets in those circumstances may also trigger increased penalties for benefiting a foreign instrumentality. The acquisition of Chinese entities also provides additional cause to be wary since the majority of EEA enforcement in recent years has involved a link to China.
Tip No. 4: Document Justification
For Hiring Competitors’ Former Employees
Not surprisingly, many EEA prosecutions stem from the illicit activities of current and former employees. One common scenario is for a disgruntled or opportunistic employee to leave his current employer with trade secret information and then attempt to sell it to a competitor or parlay it into a job opportunity. While executives may be tempted to hire employees whose primary value stems from having insider information about a competitor’s practices or products, resisting that temptation will help avoid an EEA violation. Obviously, there are instances when hiring a competitor’s former employee will be perfectly appropriate, but it is important to clearly document and supervise the process. The interview notes or summaries, offer letters, and other hiring materials should all demonstrate that the employee has value stemming from his skills, experience, academic background, or other easily identifiable traits. These skills should also closely align with the job description of the position he is hired to fill. If questions are ever raised, this allows an employer to demonstrate that it hired the employee for legitimate reasons to fill a documented need. In conjunction with the training described in Tip No. 2, it should be made clear to applicants and new hires that the company has no interest in any trade secret information they may possess from a former employer.
Tip No. 5: Establish Checks
On Any Payments to Competitors’
Former (or Current) Employees
Paying current and former employees of competitors for their “consulting services”—often a euphemism for selling trade secret information—is fairly common in EEA cases. While in some cases it may be proper to pay a consultant fee to current employees of a competitor, it is inadvisable from an EEA standpoint as the material or information gained has a high likelihood of straying into the trade secrets arena. The use of consultants who are former employees of competitors is commonplace and appropriate, but it is still important to protect the company from any inappropriate behavior or inadvertent exposure to EEA liability. Internal checks on such consulting payments should include efforts to identify and document what service or benefit the consultant provides, ascertain the reason it is best obtained from that individual, and explain and document the value of the service. Payments should only be made for clearly identified services, consulting time, or non-trade-secret items. Furthermore, the payment amounts should be proportionate to the benefit provided. Grossly disproportionate payments may be indicative of an attempt to paper over an illicit exchange. This process should not be left exclusively in the hands of individual managers but should include active and independent oversight and approval by properly trained managers, executives, or members of the compliance department.
Tip No. 6: Oversee Competitive
Competitive intelligence gathering by a sales force or designated employees may be a normal and acceptable part of many companies’ plans to stay on pace with competitors. These activities may, however, lead to an EEA investigation if the information was obtained illicitly—even if the company itself did not steal the information. For example, in United States v. Genovese,9 the individual defendant was prosecuted for selling Microsoft Windows source code that he found on the internet. Genovese did not steal the code himself, but he was aware that it was not generally available and not publicly released. Because the EEA allows for the prosecution of a company that “receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization,”10 a company could end up in similar trouble if it began to capitalize on trade secret information that someone in its workforce did not steal but came across in the course of his work. Therefore, it is important to have procedures in place to fully document and investigate the sources of any competitive intelligence, and it is equally important to fully train the competitive intelligence managers on EEA compliance.
Tip No. 7: Monitor, Document
Companies may run afoul of the EEA if reverse engineering efforts receive a helping hand from a competitor’s schematics, testing results, formulas, or other trade secret information. In United States v. Lange,11 for example, a disgruntled former employee attempted to sell a pirated copy of the AutoCAD software used to maintain the company’s drawings and specifications for an airplane brake assembly. This information would have allowed the purchaser to quickly engineer products that would meet Federal Aviation Administration certification requirements. (The would-be purchaser, however, reported the attempted sale to the FBI, which arrested the seller.) The active involvement of trained compliance professionals and managers in the reverse engineering process will help lower the risk that a company will use tempting but illicit trade secret information and will ensure a prompt internal investigation if there is any evidence of an EEA violation. It is also important that reverse engineering activities be fully documented to provide a paper trail that the company obtained results through its own legitimate efforts rather than with assistance from a competitor’s trade secrets.
Lauren Papenhausen is a partner in McDermott Will & Emery LLP’s Boston office. She focuses on white collar criminal defense and complex commercial litigation. Her practice includes representing clients under investigation or involved in disputes relating to health care billing, the False Claims Act, intellectual property, and contractual performance.
Benjamin Franklin is an associate in McDermott’s Boston office. He focuses on white collar and civil litigation matters, relating primarily to the False Claims Act and the Anti-Kickback Statute. Franklin frequently assists in conducting internal investigations and responding to government investigations.
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