On May 23, 2007, Coca-Cola employee Joya Williams was sentenced to eight years in prison for trying to sell Coke’s trade secrets to rival Pepsi. Newspapers, TV news programs and weblogs all discussed her story. One commentator labeled her a traitor and reported details of how she and her two accomplices hatched the plot in part in an Atlanta strip club and were caught on tape by the FBI discussing how they would split the $1.5 million they expected to receive for the secrets. Historically, trade secret cases have not been pablum for tabloid-style news.
For years, companies dealt with trade secrecy issues primarily through private civil actions for injunctions and damages. In a famous 1995 case, PepsiCo itself obtained an injunction to prevent a high-level manager from assuming similar duties for a competitor under the theory that it was inevitable he would disclose PepsiCo’s trade secrets to the new employer. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).
Fast forward a decade. Pepsi receives a letter, in a Coca-Cola envelope, from a purported Coca-Cola employee offering to sell “very confidential” information. Pepsi sends the letter to Coca-Cola, and Coca-Cola immediately calls in the FBI. Less than a year later, in Feb. 2007, Ms. Williams is found guilty of conspiring to steal Coca-Cola’s trade secrets, with a potential sentence of ten years in prison. U.S. Attorney David Nahmias credited aggressive work by the FBI and PepsiCo’s “good corporate citizenship” for the result. The judge at sentencing gave little weight to what was described in the press as Ms. Williams’s “mercy pleas” and handed down an even greater sentence than the Government had requested.
Just a week before Ms. Williams was sentenced, a Duracell employee from Connecticut named Edward Grande was sentenced based on his plea of guilty to a charge that he stole information about Duracell’s product and provided it to two competitors. He, too, faced the prospect of ten years in prison, as well as a $250,000 fine. Mr. Grande, however, fared somewhat better than Ms. Williams. Pleading extraordinary family circumstances, including the need to care for ailing parents “and the progressive deterioration, and ultimate death of a beloved family dog,” Mr. Grande escaped with a mere five years probation, $7,500 fine and 200 hours of community service. Likely more of a factor than the dog’s death was that, in contrast to Ms. Williams, Mr. Grande immediately admitted to his misdeeds when confronted by the authorities. The evidence in the Grande case showed that he commited the illegal acts not for pecuniary gain, but instead to “punish” senior Duracell executives whom he thought were getting exhorbitant bonuses, while the lower-level employees were either getting minimal raises or were being laid off.
In any event, these cases highlight an interesting trend: criminal trade secrecy cases are on the rise. Criminal trade secrecy prosecution is more than theoretical, and it is important for lawyers and their clients to be aware of how criminal enforcement can help protect trade secret portfolios. Many think of intellectual property infringement as a civil, rather than criminal, offense. However, some federal and state IP laws include criminal provisions. Copyright law provides criminal liability, for instance, for willful infringement of copyright for commercial advantage or financial gain. Likewise, trade secret misappropriation can result in both civil and criminal liability. California’s version of the Uniform Trade Secrets Act provides a range of civil remedies for misappropriation. The criminal trade secret provisions are found in another statute: the Crimes Against Property title of the California Penal Code. Section 499c of that title phrases the prohibited acts in terms of theft. In this context, “theft” extends far beyond the normal sense of the word and includes not only actual stealing or carrying away of the secrets but also making copies or using trade secrets without authorization. If the information is stored in a computer, such acts may also trigger a separate Computer-Related Crimes section of the same title.
On the federal side, the Economic Espionage Act, 18 U.S.C. Section 1831, et seq. (EEA), is the primary vehicle for protecting trade secrets. As its name suggests, a primary focus of the EEA is economic espionage involving foreign governments or the entities they control. However, a second branch of the EEA, Section 1832, addresses commercial trade secret theft generally. The elements of a Section 1832 violation sound much like trade secret misappropriation under the Uniform Trade Secrets Act, with the additional requirement that the secret be related to a product placed in interstate commerce.
It has been more than a decade since the passage of the EEA, yet for years it was used sparingly to protect trade secrets. Based on a listing of publicly filed EEA cases from the Justice Department Web site, approximately six EEA cases per year were brought during the period 2001 – 2005, with Section 1832 being the more commonly used branch of the Act. Notably, the first convictions on charges of economic espionage came only in December 2006. The case leading to these convictions commenced back in 2001. Two defendants were apprehended at the airport in San Francisco with material stolen from Sun Microsystems and Transmeta in their luggage. The charges of economic espionage were accompanied by charges of conspiracy, trade secret theft and transportation of stolen property. The defendants were reportedly en route to China to use the information in the design of a microprocessor for their company, which was to have provided a share of any profits to the city of Hangzhou.
Also in the Northern District of California in December 2006, a former Chinese national was charged with economic espionage based on allegations that he stole software trade secrets with military applications from his former employer, Quantum3D, purportedly for sale to the governments of China, Thailand and Malaysia. The case also involved related counts of trade secret theft in addition to the economic espionage claims
Attorneys should be mindful of significant differences between the criminal and civil trade secrecy routes. Companies have historically been reluctant to involve the authorities on trade secret matters. Calling the police or the FBI means that the company loses some control over the process. Many companies choose not to even bring civil trade secrecy actions for fear that publicity of any type will suggest that the company cannot protect its own information. Another potential concern is that the company might have some skeleton of its own in the closet, potentially unrelated to the trade secrets issue, that the authorities might learn of in an investigation. Often, such a concern is speculative. Nonetheless, human nature can make one hesitant to invite the authorities to investigate so close to home.
When a company has available to it all of the evidence needed to successfully obtain an injunction or other relief, the advantages that a private action affords can be significant. However, many trade secret thefts involve at least some unknown facts, and private investigation into those facts may not be possible. For instance, in the Coca- Cola case, the letter to PepsiCo was sent pseudonymously. The federal investigation included an undercover agent exchanging money for documents with a defendant at the Atlanta airport. Without the benefit of such an investigation, there may not have been sufficient evidence available for a private civil action.
Sometimes, a mix of criminal and civil actions can be used advantageously. In one recent case, a model train manufacturer, Mike’s Train House, claimed that its Korean manufacturer used its trade secrets in work for a competitor, Lionel. Employees of the Korean manufacturer were convicted on criminal charges in Korea. Mike’s Train House then brought a civil action in the U.S. against both Lionel and the Korean entities. Despite the criminal convictions in Korea, Mike’s Train House ran into trouble in the civil suit; in December, 2006, the Sixth Circuit Court of Appeals ruled that plaintiff’s expert gave testimony that should not have been admitted because it was hearsay based on the report of the special master in the Korean criminal actions. Mike’s Train House, Inc. v. Lionel, L.L.C., 472 F.3d 398 (6th Cir. 2006). Thus, a new trial was ordered, and the prior jury award of $26 million in damages in favor of Mike’s Train House, and an additional $15 million for unjust enrichment, has been thrown out.
While it may not make sense to go to the FBI with every client that has concerns about trade secret misappropriation, it is important to remember that criminal actions may, in some circumstances, provide relatively prompt relief that might otherwise be difficult to get.