Criminal trade secrets prosecutions tend to make national headlines, and for good reason. With fact patterns that often involve international intrigue, high technology, and millions of dollars in play, these cases can read like a James Bond flick. But while astronomical monetary figures make good copy, they also present vexing legal questions that can have drastic impacts on sentencing.

Criminal penalties under the Economic Espionage Act (EEA) are tied to the value of the alleged trade secrets at issue. Persons convicted of trade secrets theft are subject to imprisonment for up to ten years and fines of up to $250,000; a higher maximum fine obtains if twice the gain or loss associated with the offense exceeds the statutory maximum. Indeed, the sentencing guidelines require courts to consider the value of the trade secret in determining the proper sentence. Yet as many civil litigators know, ascertaining the value of a trade secret is no easy task. Moreover, in the criminal context, this task is particularly difficult because, somewhat paradoxically, a criminal defendant is not entitled to the same scope of discovery as a civil trade secret defendant.

There are three valuation models for trade secrets: income models, cost models, and market models; the particular model chosen can radically affect the value ascribed to a trade secret and in turn, the sentence a defendant receives. Yet realistically, the availability of these models to a defendant can vary widely from cases to case. For example, in the context of the inchoate offenses of conspiracy or attempted trade secrets theft, some courts have held that the government need not actually prove the existence of a trade secret at all in order to obtain a conviction. For a defendant, applying income or market models of valuation to a trade secret that might not even actually exist may prove impossible. On the other hand, the government will nearly always be able to put on evidence regarding what the victim company spent to develop or acquire the subject technology (regardless of whether the technology actually embodies any trades secrets).

Income models such as unjust enrichment, lost profits, and reasonably royalty are well developed concepts in civil trade jurisprudence. For a number of reasons, income models tend to favor the defendant. Consider for example a departing employee who absconds with an expensive prototype and then sells it on the black market for a mere fraction of the prototype’s actual worth in order to facilitate a quick sale. Alternatively, consider a defendant who, due to factors such as economies of scale or the trade secret owner’s goodwill, is unable to effectively compete with the trade secret owner. In such circumstances, income models such as unjust enrichment or lost profits can yield artificially low trade secret valuations. A reasonable royalty rate can provide a more fair and objective measure of value in such circumstances, however, without civil discovery tools, it can be difficult—if not impossible—for a defendant to obtain the information required to conduct a reliable reasonable royalty analysis. According to one recent study, despite its frequent application in the civil context, only one EEA case reflects use of a reasonable royalty measure of value.

On the prosecution side, both victims and prosecutors are prone to rely on cost models to value trade secrets in criminal cases. One reason for this is that cost models permit victims to value their trade secrets without having to disclose the sensitive business information required to conduct a reasonably royalty or lost profits analysis. In addition, in many cases, such as where the prosecution is based on a sting operation, unjust enrichment or lost profit valuations are not viable because the defendant may not have ever had a chance to put the misappropriated technology to substantial commercial use. From the prosecution’s perspective, the cost model allows for a simple, straight forward evidentiary presentation to the jury by a victim company representative as opposed to complex testimony from a paid expert. Cost models can also give the prosecution increased leverage and publicity, by permitting the prosecution to rely on exorbitant, headline-grabbing development costs to reach a valuation. And it is worth noting that the FBI’s EEA reporting checklist appears skewed towards obtaining an initial cost model valuation, which may cause the government to form an early view of valuation that is not easily altered as the case progresses.

The Sentencing Guidelines, in turn, generally favor a fair market value model of valuation, but this model is often unavailable because in many instances, there is no legal market for the misappropriated information and thus no legitimate fair market value. Moreover, according to the most recent study on trade secret valuation in EEA cases, market models have generated the widest range of trade secret valuations, perhaps due to the relative subjectivity nature of market modes in comparison to income and cost models.

Finding the right method for valuing trade secrets in criminal cases is critically important; the wrong valuation can mean the difference between an appropriate sentence and an unjust one. In one recent case, the prosecution urged the court to value the misappropriated secret based on the victim company’s claimed $4 million development cost for the subject technology. The Court apparently rejected the government’s position and sentenced the defendant to one year of imprisonment. But had the court adopted the government’s valuation, the sentencing guidelines could have resulted in an 18 point increase to the base level offense score. Attention, then, to the means of valuing trade secrets is itself a matter meriting review as to whether the present level of discretion under the guidelines is appropriate. Equal treatment of defendants and due process may hang in the balance.