Criminal Enforcement Protects Trade Secrets Taken By Departed Employees

[caption id="attachment_2116" align="alignright" width="113"] James P. Flynn[/caption]

In the recent case of United States v. Nosal, the United States Court of Appeals for the Ninth Circuit confirmed the applicability of both the Computer Fraud and Abuse Act and the Economic Espionage Act as safeguards against theft of trade secrets by departed former employees.  Importantly, Nosal applied such laws to convict a former employee in a case involving domestic businesses and personnel without any alleged overseas connections.  Because of civil enforcement provisions in the CFAA itself and the recently enacted Defend Trade Secrets Act, Nosal represents a possible guide to employers seeking to protect their trade secrets through civil or criminal mechanisms, or both.

In assessing the implication of Nosal, one may consider three framing questions:

1. How does this case take the trend of criminalization and federalization of trade secret law a step further?

The Nosal case is a great example of three trends coming together to give corporate employer and trade secret owners access to new avenues for relief.

First, Nosal pushes forward the trend that began in 2013 when the Department of Justice announced that trade secret prosecutions would become an area of emphasis.  Since then, DOJ has been much more receptive to business crime claims.

Second, it is the next step in the law’s evolution—the majority decision construed both the Consumer Fraud & Abuse Act and Economic Espionage Act in a complementary manner consistent with their plain language and applied them to common sense circumstances that seemed like theft. The CFAA is written in language beyond that of  a technical anti-hacking statute, and it is important that a federal appeals court has recognized that scope.

Third, and most importantly, Nosal is a step in the right direction on protecting trade secrets whether or not there are later criminal prosecutions on similar theories.  That is because the CFAA and now, since April, the Defend Trade Secrets Act also allow for civil remedies. Nosal’s common sense result was that one is acting without authorization when one uses another’s password because the actor’s password  has been revoked—that holding is not only a tool for prosecutors, but is one that civil litigants could use as well.

2. Why have there been more criminal convictions in trade secrets cases in the past few years?

Changes in in policy, changes in politics, and changes in perceptions.

First, the Obama administration formally issued a written policy in February 2013 announcing ADMINISTRATION STRATEGY ON MITIGATING THE THEFT OF U.S. TRADE SECRETS.  So one is seeing more prosecutions, and convictions, in some sense because DOJ has pursued that policy.

Second, there is a growing sense that these crimes not only hurt individual companies economically, but hurt the United States and its citizens more generally. That is why so many of the higher profile trade secret prosecutions have involved defendants who were foreign nationals or were assisting foreign companies.  Public and political support for pursuing such cases cannot be underestimated.

Finally, in light of the announced policy and the evolving political reality, companies are simply more likely to report such crimes. In the past, victimized companies hesitated to draw attention to their own losses or injuries and thought doing so also required them to give up control of recovery efforts to prosecutors.  Those perceptions have changed, and Nosal and cases like it are examples of such changes.

3. What were the key takeaways from the dissent in Nosal that might gain traction as other circuits address these issues?

The dissent had three main criticisms of the majority opinion.

The first criticism was that, in the dissent’s view, the 9th Circuit improperly expanded the CFAA beyond its anti-hacking roots to apply it to what the dissent described as mere password sharing.

Second, the dissenting judge contended that the decision effectively turns employers’ computer use policies into non-public criminal codes of which defendants have inadequate notice.

Third, and what likely in some ways probably motivates the dissent’s first two points, the dissent observed that this decision potentially empowers corporate employers to have undue influence in criminal prosecutions.

These statutes and the criminal prosecution of trade secret theft continue to be areas of interest that trade secret owners and their counsel should follow, and should consider in enforcing their own rights in these matters.