On June 18, 2008, software engineer and California resident Xiaodong Sheldon Meng was sentenced on the rare charge of committing economic espionage against the United States, in violation of the Economic Espionage Act of 1996 (18 U.S.C. Section 1831). The U.S. District Court for the Northern District of California sentenced Meng to 24 months in federal prison, and also ordered a three-year term of supervised release, a fine of $10,000, and the forfeiture of computer equipment seized in the case. Meng’s espionage included misappropriating a trade secret, known as “Mantis 1.5.5,” from his former employer, San Jose-based Quantum3D, Inc., with the intent of benefitting a foreign government. Quantum 3D produces hardware and software components for simulation systems for commercial and military customers. Some of the company’s products include high-end visual simulation systems, and interactive, open-architecture visual computing solutions, image generators, and embedded graphics subsystems.

Meng allegedly installed a demonstration unit of military simulation software at the People’s Republic of China’s Navy Research Center in Beijing. The demonstration project was part of a sales effort on behalf of his new employer, Orad, Hi-Tec Systems Ltd., based in Israel, which is a direct competitor of Quantum3D. Meng was also charged with violating the Arms Export Control Act (“AECA”) by knowingly and willfully exporting a defense article (the Quantum3D fighter-pilot simulation software program called “viXsen”) to China without export authorization. The investigation established that Meng also exported another defense article—Quantum3D’s night vision simulation software, nVSensor—and six military source code products. Meng was apparently involved in developing military proposals for two separate Air Forces in Southeast Asia involving the misappropriated technology and source codes.

The Department of Justice release noted that Quantum3D fully cooperated in the government’s investigation. The release did not indicate whether any charges were to be brought against Meng’s employer, Orad Hi-Tech Systems Ltd., on whose behalf Meng’s activites apparently took place.

The Economic Espionage Act

The Economic Espionage Act (“EEA”) generally criminalizes the theft or misappropriation of trade secrets. The EAA imposes fines of up to $250,000 and 10 years’ imprisonment for individuals, and up to $5 million for corporations, for any theft, attempted theft, or conspiracy to steal trade secrets, with the following limitations: (1) the trade secret must be related to a product in interstate or foreign commerce; (2) the theft must be for the economic benefit of someone other than the trade secret owner; and (3) the thief must intend or know that the theft will injure any owner of the trade secret. In the case of foreign trade secret theft, the EAA carries fines of up to $500,000 or 15 years’ imprisonment for individuals, and fines of up to $10 million for corporations, where the theft of the trade secret is undertaken with the specific intent or knowledge that the offense will benefit any foreign government, foreign instrumentality, or foreign agent.

Protecting Trade Secrets Under the EAA

The definition of the term “trade secret” under the EEA is very broad. It includes all types of information, however stored or maintained, where: (1) the information is actually secret, in that it is not generally known or readily ascertainable through proper means by the public; (2) the owner has taken reasonable measures to keep the information secret; and (3) the information derives independent economic value from its status as secret. While analogies to trade secret law give guidance as to what constitutes a “secret” and the notion of economic value is virtually assumed, for the purposes of the EEA, reasonable protective measures are within a company’s control. Trade secret protection should be reasonably tailored to the circumstances of the data to be protected and may include:

  • Devising and implementing a corporate trade secret policy
  • Training employees on the corporate trade secret policy
  • Marking all files and documentation with appropriate trade secret/confidentiality notices and warnings
  • Limiting access of employees and third parties on a “need to know basis”
  • Requiring employees to sign confidentiality and non-disclosure agreements
  • Keeping hard copy documents under lock and key and soft copy documents secured with passwords and firewalls
  • Requiring non-disclosure agreements with all authorized recipients of the information 
  • Reviewing all publicly disclosed documents to be released by the company for trade secrets or confidential information
  • Policing and enforcing company policy, employment agreements and third-party agreements

Conclusion

While the EAA can be used in addition to civil litigation tools to rectify a trade secret theft more completely than damages alone, it can just as easily be a source of liability should a company’s own employees acquire or utilize improperly acquired trade secrets of competitors or collaborators. Therefore, companies should consider how the EAA may be woven into overall corporate compliance and intellectual-property-rights protection programs.