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Theft of Computer Code Trade Secrets Ruled Not Criminal: Second Circuit
Practical Law Legal Update 4-518-9042 (Approx. 5 pages)
Theft of Computer Code Trade Secrets Ruled Not Criminal: Second Circuit
by PLC Intellectual Property & Technology and PLC Labor & Employment
| Published on 12 Apr 2012 • USA (National/Federal) |
On April 11, 2012, the US Court of Appeals for the Second Circuit issued its opinion in US v. Aleynikov holding that Sergey Aleynikov, a computer programmer who stole valuable and confidential source code from his employer, Goldman Sachs, did not violate the National Stolen Property Act (NSPA), the Economic Espionage Act of 1996 (EEA) or the Computer Fraud and Abuse Act (CFAA).
Key Litigated Issue
In US v. Aleynikov, the key issue decided by the US Court of Appeals for the Second Circuit was whether Sergey Aleynikov's theft of source code from his employer Goldman Sachs concerning its high-frequency trading (HFT) system violated the National Stolen Property Act (NSPA) or the Economic Espionage Act of 1996 (EEA). Specifically, the Second Circuit considered whether the source code:
- Constituted stolen "goods," "wares" or "merchandise" within the meaning of the NSPA.
- Was a product "produced for or placed in interstate or foreign commerce" within the meaning of the EEA.
Background
Sergey Aleynikov was a computer programmer employed by Goldman Sachs for about two years developing computer source code for Goldman's proprietary HFT system. Goldman closely guards the secrecy of its HFT system and does not license it to anyone. Goldman's confidentiality policies bound Aleynikov to keep Goldman's proprietary information in confidence and prohibited him from taking it or using it when his employment with Goldman ended.
Although Aleynikov was earning $400,000 at Goldman and was the highest-paid programmer in his group, he accepted an offer to work at Teza Technologies LLC, a startup company seeking to develop its own HFT system, at over $1 million annually. On Aleynikov's last day at Goldman, he encrypted and uploaded to a server in Germany more than 500,000 lines of source code for Goldman's HFT system. After uploading the source code, Aleynikov deleted the encryption program and the history of his computer commands. He later transferred the source code from the server in Germany to his home computer in New Jersey and other computer devices he owned. Aleynikov then brought portions of the source code with him to a meeting at his new job with Teza in Illinois.
Aleynikov was later arrested and charged with violations of the:
- NSPA, which makes it a crime to transport, transmit or transfer in interstate or foreign commerce any goods, wares, merchandise, securities or money, valued at $5,000 or more, knowing it was stolen or taken by fraud (18 U.S.C. § 2314).
- EEA, the relevant portion of which makes it a federal offense to intentionally convert a trade secret that is related to or included in a product that is produced for or placed in interstate or foreign commerce for the economic benefit of anyone other than the owner intending or knowing that the offense will injure the trade secret owner (18 U.S.C. § 1832).
- Computer Fraud and Abuse Act (CFAA), which makes it a crime to intentionally access a computer without authorization or exceeds authorized access and thereby obtain information from any protected computer (18 U.S.C. § 1030(a)(2)(C)).
Aleynikov moved to dismiss the indictment for failure to state an offense. The US District Court for the Southern District of New York dismissed the CFAA count because Aleynikov was authorized to access the Goldman computer and did not exceed the scope of his authorization. The district court denied Aleynikov's motion concerning the NSPA and EEA counts and the jury convicted Aleynikov on both of those counts.
Aleynikov was sentenced to 97 months in prison, followed by three years of supervised release plus a $12,500 fine.
Aleynikov appealed the conviction and sentence to the Second Circuit. On February 17, 2012, the Second Circuit reversed the conviction in a short order and followed up with the April 11, 2011 opinion.
Outcome
The Second Circuit's decision reversed the conviction on both counts, concluding that the indictments were insufficient as a matter of law.
NSPA
To determine if Aleynikov is guilty of a crime under the NSPA, the Second Circuit considered whether the source code that Aleynikov uploaded to a server in Germany, then downloaded to his computer devices in New Jersey and later transferred to Illinois constituted stolen "goods," "wares" or "merchandise" under the statute.
The Second Circuit considered established case law, including the decision in Dowling v. US, for the proposition that the theft and subsequent interstate transmission of purely intangible property is beyond the scope of the NSPA (473 U.S. 207 (1985)).
Additionally, the Second Circuit noted that Aleynikov stole purely intangible property and that there was no allegation that he physically stole anything tangible from Goldman, such as a compact disc or thumb drive containing the source code. It was not sufficient that Aleynikov transported portions of the source code on his laptop and flash drive to Illinois because, according to the Second Circuit, the NSPA requires that the thing stolen must be a good, ware or merchandise at the time of the theft.
EEA
To determine if Aleynikov violated the relevant portion of the EEA, the Second Circuit considered whether the source code was produced for or placed in interstate or foreign commerce, as required by the statute. The Second Circuit determined that Goldman's HFT system was neither produced for nor placed in interstate or foreign commerce because Goldman:
- Had no intention of selling it or licensing it to anyone.
- Went to great lengths to maintain the secrecy of its HFT system.
- Enjoyed enormous profits from its HFT system, which depended on no one else having the system.
Practical Implications
Companies should be aware that federal statutes like the NSPA, EEA and CFAA cannot be used to prosecute employees or former employees who have authorized computer access to intangible trade secrets, steal those trade secrets and transmit them over the internet. Companies should consider alternate ways to protect their valuable intangible information, including additional information technology infrastructure and use of a confidentiality agreement, until the US Supreme Court provides different guidance or Congress amends these statutes.