Expansion of the Economic Espionage Act Broadens Protection for Trade Secrets

In the summer of 2009, in an office at Goldman Sachs, in the waning hours of his last day of employment, a computer programmer named Sergey Aleynikov encrypted more than 500,000 lines of source code from Goldman’s proprietary high-frequency trading system, uploaded the code to a server in Germany, and then deleted the history of his computer commands and slipped out the door to attend his going away party.  He later downloaded the code from Germany onto his home computer and other personal devices.  He took portions of the encrypted code to a meeting with his new employer, by whom he had been hired to create the same type of code in an impossibly short span of time.  The FBI arrested Aleynikov at Newark Liberty International Airport as he was returning from the Chicago meeting, flash drives and laptop in hand.  Aleynikov was indicted for violating the Economic Espionage Act of 1996, 18 U.S.C. § 1832 (the “EEA”), among other charges, and was convicted by a jury in the Southern District of New York in 2010.  United States v. Aleynikov, 737 F. Supp. 2d 173 (S.D.N.Y. 2010).  He was sentenced to an eight year prison term.  However, he received a reprieve in 2012 when the Second Circuit performed a detailed textual analysis and determined that the stolen code was neither a product “produced for,” nor “placed in,” interstate commerce, and therefore could not violate the statute as worded.  The Court held that “Aleynikov should have known [his conduct] was in breach of his confidentiality obligations to Goldman, and was dishonest in ways that would subject him to sanctions; but he could not have known that it would offend this criminal law or this particular sovereign.”

In response to this holding, Congress unanimously passed the Theft of Trade Secrets Clarification Act of 2012, which President Obama signed on December 28, 2012.  The Act amends Section 1832(a) to include not only products, but also services, and was designed “to ensure that American companies can protect the products they work so hard to develop, so they may continue to grow and thrive,” according to Senator Patrick Leahy’s comments in a November 27th debate.  The amendment will have a great impact on the financial sector, which relies heavily on proprietary systems that gather information but are not themselves sold in interstate commerce, and may impact computer software companies, and others, as well.  Congress’s rejection of the Second Circuit’s narrow ruling will almost certainly lead to a growth in the number of indictments under this Act.

Congress passed an additional amendment on January 1, 2013, one that still awaits the President’s signature.  This bill, entitled the “Foreign and Economic Espionage Penalty Enhancement Act of 2012,” raises the fines and penalties for violation of the EEA.  Despite these enhancements to the strength of the Act, the EEA still provides no private cause of action.  The lack of such a right leaves companies in the position of continuing to seek redress for trade secret violations at the state level, or, at best, to cooperate with the federal authorities to assist in a criminal case against alleged violators.  Nevertheless, in the face of the Aleynikov case and other similar recent cases (see, e.g., United States v. Agrawal, pending in the Second Circuit), the strengthened EEA creates more protection for company trade secrets.  Employees in the relevant fields should take notice.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.

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United Health Services Wins $6.9 Million Verdict in Non-Compete Claim Against Acadia Healthcare

On December 22, 2012, ModernHealthcare.com reported that United Health Services (“UHS”), based in King of Prussia, Pennsylvania, won a $6.89 million jury verdict against Acadia Healthcare (“Acadia”), a healthcare company based in Franklin, Tennessee.

According to the article, UHS filed suit in October 2011 in Denton County, Texas alleging five former executives breached their non-compete agreements and misappropriated UHS’ confidential information when they went to work for Acadia.  The five former executives were employed by Horizon Health Corp., a subsidiary of Psychiatric Solutions, which UHS acquired in 2010.  Acadia is a venture of Psychiatric Solutions’ former CEO.  UHS’ suit alleged the five former executives set up an Acadia subsidiary, Psychiatric Research Partners, which mirrored the operations of Horizon Health Corp.  The five former executives then pursued sales leads they acquired while at Horizon Health Corp. on behalf of Arcadia.

In addition to UHS’ charges against the five former executives, UHS also charged Acadia with misappropriating its confidential sales leads.

The Denton County, Texas jury returned a verdict in favor of UHS for $6.89 million in what was described as a case that was “litigated in a very heated manner.”

UHS’ president stated he hopes the jury’s verdict “sends a message about the appropriate conduct of business and commitment to ethics and integrity.”

It remains to be seen whether Acadia will appeal the verdict.

The complete modernhealthcare.com article can be viewed online here.

If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.