A bad guy steals something, and the victim calls the cops.  The same is true when someone unwittingly ends up with stolen property.  Once they figure out that the stuff is hot, they know they should call the cops.  These are basic concepts, but when the thing stolen is that particularly fragile sort of asset known as a trade secret, and civil remedies are also in play, the analysis is more complex.

When it comes to trade secrets, the cops—i.e., the Department of Justice and its United States Attorneys—are now well armed to punish theft.  With an amendment passed on December 28, 2012, section 1832 of the Economic Espionage Act of 1996 (the “EAA”) was expanded to cover theft of trade secrets related to services and internal processes.  With this important change and the statute’s significant existing penalties (for individual offenders, up to ten years in prison and up to the greater of $250,000 or twice the value of the stolen trade secret; for corporate offenders, up to a $5,000,000 fine), the EAA presents a significant tool for combatting commercial trade secret misappropriation.  But the question remains: When should one refer trade secret theft to the federal government for investigation of potential section 1832 violations?  That is, when is it a good idea to call the cops?

Trade Secret Theft Victims

A victim of trade secret theft must carefully consider the many pros and cons of seeking a federal criminal investigation.  The pros are significant.  Consider evidence collection.  Civil litigators can request and compel document production, but such measures are often slow and ineffective.  In contrast, the Department of Justice has impressive investigative powers.  FBI agents can obtain search warrants through ex parte hearings and seize hard drives and other electronic media.  And when a matter reaches the grand jury stage, subpoenas can be both very broad in scope and very difficult to challenge.  Just the hint of a federal investigation can make folks sit up and take notice.  This means DOJ involvement may be the quickest way to stop the dissemination of the misappropriated information—which, as we all know, can completely destroy the trade secret status (and value) of that information.  Last but not least, the possibility of the federal government bearing some of the expenses of investigating and stopping trade secret theft may greatly appeal to victims with limited resources.

Despite these obvious advantages, a victim’s choice to refer a case is not without costs.  First and foremost, that decision is also one to significantly relinquish control over the outcome of the situation.  With a criminal investigation pending, a trade secret thief may be less able to finally and fully settle its disputes with the victim, even if they can reach agreement.  Also, with the threat of criminal prosecution looming, witnesses in civil matters are able (and likely) to assert the Fifth Amendment privilege against self-incrimination in circumstances where they might otherwise be compelled to testify.  But the most significant factor to consider is the likelihood that the thief or the federal government may seek a stay of any pending or future civil litigation, shutting things down entirely until the resolution of the criminal matter.  And, while restitution is required under section 1832, there is real risk that a conviction under the statute could adversely affect a defendant’s ability to pay such an award—not to mention any later civil judgment providing attorney’s fees and punitive damages.  In short, even for victims of trade secret theft, the decision to “call the cops” and seek the DOJ’s involvement is not a simple one.

Companies in Possession of Potentially Misappropriated Trade Secrets

Although it may be counterintuitive, in the case of corporations that are potentially in possession of misappropriated trade secrets, there can be significant benefits to self-reporting.  For example, when the company whose employee misappropriated trade secrets (often by leaving a previous job with a thumb drive or personal laptop full of confidential information) is innocent of any intentional wrongdoing, that company may be better off going to the authorities before the former employer does.  Cooperating with the U.S. Attorney’s office and its investigators can go a long way toward showing that one’s company has nothing to hide and never intended to get the other company’s trade secrets.  Doing so could be especially important for purposes of ending up on the right side of prosecutorial discretion.  (For the factors considered by the DOJ in making charging decisions, see Principles of Federal Prosecution of Business Organizations).  Also, when criminal charges are inevitable or at least likely, getting ahead of the complaining party may help to minimize the disruption any investigation will cause to the business of the company that received the secrets.  However, regardless of the potential benefits of self-reporting, a holder of misappropriated trade secrets must be mindful that any communications to the U.S. Attorney’s office will likely be discoverable in civil litigation.

In the case of a company whose hands are less than clean in acquiring misappropriated trade secrets, the decision to self-refer is more difficult—just as it is for the knowing purchaser of fenced goods.  Such a company might not want to risk waiving Fifth Amendment protections or encourage a criminal investigation under borderline circumstances.  In addition, the potential of an adverse inference in a civil action from the assertion of the Fifth Amendment privilege might lead such a company to think twice about self-referring.  On the other hand, the severe, wide-ranging negative effects of a criminal indictment give culpable companies good reason to settle charges through non-prosecution or deferred prosecution agreements.  Again, it is a complex decision.