July 15, 2019

Recent Criminal Misappropriation of Trade Secrets to China

Holland & Knight Trade Secrets Blog
Brandon H. Elledge | Megan Mocho | Angela M. Jimenez

Trade secrets can be stolen at any point, and such theft can be prosecuted by the Department of Justice. This is evident in recently unsealed charges brought against a software engineer who stole source code from his United States employer to benefit a Chinese company with whom he had negotiated subsequent employment. These active efforts to obtain and distribute trade secrets are subject to enforcement of criminal violations under the Economic Espionage Act, 18 U.S.C. § 1831 et seq. (the Act) and other related statutes.  Pursuant to the Act, trade secret theft can lead to civil actions, but also to criminal prosecutions.  The Act makes it a crime to steal trade secrets or obtain trade secrets with knowledge that they were stolen. 18 U.S.C. § 1831(a).  Similar to DTSA, the Act broadly defines trade secrets to include:

"forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing."

provided that the owner takes "reasonable measures to keep such information secret" and the continued secrecy of the information has actual or potential "independent economic value." 18 U.S.C. § 1839.  Violators can be imprisoned and/or fined.  Violators who intend to benefit a foreign government face higher penalties.

The case, United States v. Yao, No. 1:17-cr-00795 (N.D. Ill.), involved a former software engineer of an unnamed Chicago locomotive manufacturer who was indicted under the Act for stealing the company's proprietary information to benefit his new employer in China. According to the indictment, defendant Yao had been seeking and negotiating his employment with the Chinese company while working for the Chicago company. The indictment alleges he downloaded more than 3,000 electronic files relating to the manufacturer's locomotives operating system, including "nine complete copies of Company A's control system source code."  Prosecutors claim he began downloading the electronic files within two weeks of starting at the company – he started in late August 2014 and, by September 2014, had stolen thousands of confidential documents.

In February 2015, prosecutors claim Yao downloaded additional confidential documents, which included technical documents and more source codes.  According to the indictment, the company fired him on February 9, 2015 for reasons unrelated to the theft, and he began working with the Chinese company in July 2015.  Prosecutors further allege he travelled from China to Chicago, approximately four months later, with the thousands of illegally obtained proprietary documents, that included nine complete copies of the manufacturer's source code and specifications needed to implement the source code. He was indicated in December 2017, and an arrest warrant was issued by U.S. District Judge Rebecca Pallmeyer on December 13, 2017.  He now faces nine counts of trade secrets theft.

This recently unsealed indictment demonstrates the DOJ's continued enforcement in this area and coincides with the United States demands that China make policy changes to better protect the intellectual property of members of the United States.  It also serves as a reminder to companies victimized by trade secret theft and employees who handle protected proprietary information of the criminal remedies available under the Act and the risks of misappropriation of trade secrets. Trade secret theft carries a maximum 10-year prison term per theft.

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