ADMINISTRATION STRATEGY ON MITIGATING THE THEFT OF U.S. TRADE SECRETS AIPLA – Spring Meeting 2013 PETER J. TOREN WEISBROD, MATTEIS, AND COPLEY PLLC 1900 M STREET, N.W. WASHINGTON, D.C PETERTOREN.COM Weisbrod Matteis & Copley PLLC 1

Peter Toren, Esq. Weisbrod, Matteis & Copley PLLC Weisbrod Matteis & Copley PLLC 2 Peter J. Toren is a former partner at Sidley & Austin and a former federal prosecutor – one of the first attorneys with the Computer Crime & Intellectual Property Section or CCIPS. He specializes in patent, trademark, copyright and trade secrets cases that involve diverse technologies from computer software and hardware to light-emitting diodes, biotechnology to semiconductor manufacturing and fabrications, optics and medical devices to business methods. He is author of Intellectual Property & Computer Crime (Law Journal Press), first published in It has been described as a “must-have desk reference.” He is the winner of the 2010 Burton Award for Excellence in Legal Writing. In addition to his book, his teaching positions and numerous articles, Mr. Toren is a frequent contributor to the press and has recently appeared in The Wall Street Journal, New York Times, Forbes, CNN, Bloomberg TV and The Guardian.

Administration Strategy on Mitigating the Theft of U.S. Trade Secrets Weisbrod Matteis & Copley 3 “We are going to aggressively protect our intellectual property. Our single greatest asset is the innovation and the ingenuity and creativity of the American people. It is essential to our prosperity and it will only become more so in this century.” President Barack Obama

Administration Strategy on Mitigating the Theft of U.S. Trade Secrets Weisbrod Matteis & Copley 4 Why now? What is it? Existing U.S. law (Economic Espionage Act). Prosecutions to-date. New laws?

Why Now? Weisbrod Matteis & Copley 5 Importance of IP to the U.S. economy Pace of economic espionage and trade secret theft against U.S. corporations is accelerating  Foreign governments  Foreign corporations  Recruitment of current or former employees  Cyber intrusions Threatens the health and vitality of U.S. economy

Cyber Intrusions Weisbrod Matteis & Copley 6 United States (2012)  621 confirmed data breaches  47,000 security incidents  37% financial firms  24% retailers/restaurants  20% manufacturing/transportation/utility  20% information/professional services firms  75% of successful breaches were for financial gain.  2 nd most common was a state-affiliated attack aimed at stealing IP to further national and economic interests  Only 14% were the work of insiders.  76% of data breaches, weak or stolen user names/passwords were a cause  40% malicious software was installed  29% social engineering, spear phishing  Discovery time is measured in months/years (Source: Verizon annual report)

Overview – Strategy Action Items Weisbrod Matteis & Copley 7 1. Focus Diplomatic Efforts to Protect Trade Secrets 2. Domestic Voluntary Best Practices by Private Industry to Protect Trade Secrets 3. Enhance Domestic Law Enforcement Operations 4. Improve Domestic Legislation 5. Public Awareness and Stakeholder Outreach

Diplomatic Efforts Weisbrod Matteis & Copley 8 Coordinated diplomatic approach  “Other governments must recognize that trade secret protection is vital to the success of our economic relationships and that they must take steps to strengthen their enforcement against trade secret theft.” Departments of Commerce, Defense, Justice, Homeland Security, State, Treasury, and U.S. Trade Representative  Deliver message  Build coalitions  IPR working groups Trade policy tools e.g., cooperation with trading partners, enhanced use of Special 301 process, raise importance of trade secrets in all appropriate forums International Law Enforcement Cooperation International Training and Capacity Building International Organizations

Diplomatic Efforts Weisbrod Matteis & Copley 9 Important step?  Rest of the world is less concerned with the protection of IP, especially trade secrets  Formalize protection  Difficult to quantify

Promote Voluntary Best Practices by Private Industry to Protect Trade Secrets Weisbrod Matteis & Copley 10 Encourage companies to share practices that can mitigate the risk of trade secret theft  Efforts will be led by U.S. Intellectual Property Enforcement Coordinator (IPEC) Suggested areas of concern  Research and development compartmentalization  Information security policies  Physical security policies  Human resources policies

Promote Voluntary Best Practices by Private Industry to Protect Trade Secrets Weisbrod Matteis & Copley 11 Recognizes government’s limitations/places emphasis on the private sector’s role in protecting trade secrets Facilitate private sector efforts to develop and share voluntary best practices Must be consistent with antitrust laws

Enhance Domestic Law Enforcement Operations Weisbrod Matteis & Copley 12 FBI – increased the number of trade secret investigations by 29% from 2010 Trade secret theft is a top priority Law enforcement and intelligence information sharing  Office of the Director of National Intelligence (ODNI) – coordinate with the intelligence community to inform the private sector about ways to identify and prevent theft of trade secrets that benefit a state sponsor DOJ  Report on prosecutions/investigations  Local outreach program  Train prosecutors/agents National Intellectual Rights Coordination Center – will obtain leads regarding trade secret misappropriation through its “Report IP Theft” initiative.

Improve Domestic Legislation Weisbrod Matteis & Copley 13 IPEC 2011 White Paper recommended legislation to increase the statutory maximum for economic espionage  Sentencing Commission should consider increasing the range for theft of trade secrets. Theft of Trade Secrets Clarification Act  Closed Aleynikov loophole Foreign/Economic Espionage Penalty Act of 2012  Increased statutory penalties for economic espionage  Directed Sentencing Commission to increase offense levels IPEC to coordinate review of existing federal laws to determine if legislative changes are need to enhance enforcement against trade secret theft  Will provide recommendation to Congress

Federal Register Request for Comments Weisbrod Matteis & Copley 14 March 19, 2013 IPEC requested comments/recommendations that would enhance enforcement against, or reduce the risk of, the misappropriation of trade secrets for the benefit of foreign competitors or foreign governments Submissions were due by April 22, 2013

The Economic Espionage Act Weisbrod Matteis & Copley 15 EXISTING LAW

Economic Espionage Act Weisbrod Matteis & Copley 16 Section 1831: Economic Espionage Section 1832: Theft of Trade Secrets Common elements  Misappropriation of information.  Knowledge that the information is a trade secret.  Information is in fact a trade secret.  Depends on the value of the trade secret and the industry.  Does not include general knowledge, skill or abilities.  Focus is on how the defendant obtained the trade secret.  Statute reaches overseas conduct.

An Analysis of EEA Prosecutions: What Companies Can Learn From It and What the Government Should Be Doing About It! Weisbrod Matteis & Copley Location of the cases 2. Extent of foreign government involvement 3. Defendant’s gender 4. Defendant’s level of education 5. Relationship of defendant to the victim 6. Nationality of defendant/purpose of the theft 7. Type of trade secrets stolen 8. Adequacy of protective measures 9. Dispositions 10. Sentences

EEA Prosecutions – Number of Cases Weisbrod Matteis & Copley 18 9 prosecutions under § under § 1832 Year § §

Why So Few Section 1831 Prosecutions? Weisbrod Matteis & Copley 19 Foreign government operatives are likely to be more skilled in stealing trade secrets Difficulty of proving that theft was directed by a foreign government Sentencing Guidelines are similar for sections 1831/1832 Bureaucratic system discourages charging a violation of section 1831

Prosecutions – Location of Cases Weisbrod Matteis & Copley 20 Top 5 Jurisdictions  N.D.Cal -24  S.D. Tex. – 8  S.D.N.Y. – 7  C.D.Cal – 7  D.N.J. – 6  E.D.Mich – 6 Less than 45% of all districts have prosecuted a case under the EEA

Prosecutions – Number/Location of Cases Weisbrod Matteis & Copley 21 Relatively small number of cases unlikely to have a deterrent effect  Certainty of punishment produces a stronger deterrent effect than increasing the severity of the punishment

Prosecutions – Defendant’s Gender/Level of Education Weisbrod Matteis & Copley 22 Defendant is male in 93% of the prosecutions Defendant is usually well-educated.  Includes former nominee for the Nobel Prize in Chemistry

Prosecutions – Relationship of Defendant to Victim Weisbrod Matteis & Copley 23 90% of the prosecutions – Defendant was an insider  Employee of victim, worked for a vendor or contractor of the victim Theft was committed shortly before defendant left company

Prosecutions – Nationality of Defendant/Purpose of Theft Weisbrod Matteis & Copley 24 30% of the prosecutions – defendant misappropriated the trade secrets to benefit the Chinese government, an existing Chinese government or to start a company in China. Since 2008 – over 40% of all cases indicted have a China connection Defendants also intended to benefit government companies in India, Dominican Republic, Korea, and South Africa.

Prosecutions – Type of Trade Secrets Weisbrod Matteis & Copley 25 Type of misappropriated trade secrets varies greatly  Examples - formula used in the manufacture of solar cells; drug formulae; design of parts for cars; semiconductor equipment; source code for financial and other products; customer lists and marketing plans

Prosecutions - Victims Weisbrod Matteis & Copley 26 Victim is usually a large U.S. corporation, but not always.

Prosecutions - Dispositions Weisbrod Matteis & Copley 27 Defendant pleaded guilty 85% of the time. 4% of the cases the charges were dismissed without prejudice. 5 defendants fled and are still being sought. 12 cases went to trial.  Defendant acquitted in 2 cases.

EEA Sentences Weisbrod Matteis & Copley 28 Sentence§ 1831§ 1832 Probation/Supervised Release 027 Home Confinement months months months months months15  96 months1 (Chung – 188 months)1 (Williams – 96 months)

Notable Examples Weisbrod Matteis & Copley 29 Former Dow scientist sentenced to 5 years for stealing trade secrets relating to Dow’s CPE process and product technology and conspiring to sell the technology to various Chinese Companies. (U.S. v. Liu, No. 3:05-CR (M.D.La. 2011). Former Boeing engineer sentenced to 188 months imprisonment for stealing trade secrets relating to the Delta IV Rocket, F-15 Fighter, and the Space Shuttle. Provided information to Chinese companies for over 15 years. (United States v. Chung, 8:08-CR N.D.Cal. 2008).

Current Case Weisbrod Matteis & Copley 30 The government charged a Chinese company, the Panang Group, which has Chinese government ties, was behind the attempted theft of trade secrets from DuPont relating to technology to produce titanium dioxide, a white pigment used in paints and other products. (U.S. v. Walter Lian-Heen Liew, 11-CR-0573, N.D.Cal.). 1 st case actually charging a Chinese company owned or controlled by the state.

Nosal Found Guilty in Trade Secret Case Weisbrod Matteis & Copley 31 SAN FRANCISCO — Nearly eight years passed from the time FBI agents raided corporate recruiter David Nosal's office in 2005 to the start of his criminal trial this month in San Francisco federal court. After deliberating for just over two days, the jury on Wednesday found Nosal, 55, guilty of conspiracy, stealing trade secrets and violating the Computer Fraud and Abuse Act The verdict in the case comes a year after the U.S. Court of Appeals for the Ninth Circuit sided with Nosal's defense lawyers in a pivotal en banc decision that junked six additional computer hacking charges against the former Korn/Ferry International executive. But Assistant U.S. Attorneys salvaged their case, albeit on narrower charges, persuading the jury that on at least three occasions in 2005 Nosal directed accomplices to sneak into Korn/Ferry's computer database with a borrowed password in violation of the CFAA.

Recommendations To the Government Weisbrod Matteis & Copley 32 Increase number of cases investigated/prosecuted  Overcome bureaucratic resistance  Revise internal prosecution guidelines Consolidate investigations/prosecutions under sections 1831/1832 to more accurately reflect whether the theft was sponsored by a foreign entity Increase section 1832 penalties Enact Civil Trade Secret Law

A Modest Proposal Weisbrod Matteis & Copley 33 New EEA Section – Intent to transmit a stolen trade secret to a company or entity located outside of the U.S.  Provides prosecutors with the opportunity to charge a defendant that more accurately reflects the seriousness of the crime. Enact a civil counterpart to the EEA

Need More Information? Weisbrod Matteis & Copley 34 Intellectual Property & Computer Crimes, (Law Journal Press) Coverage includes detailed analysis of the Economic Espionage Act based on the latest cases; how to calculate damages and the meaning of unauthorized access under the Computer Fraud and Abuse Act; recent prosecutions under the Trademark Counterfeiting Act; state prosecutions for computer hacking and theft of trade secrets; and civil cases brought under the DMCA. In addition to analysis of laws aimed specifically at intellectual property violations, you'll find discussion of how general criminal laws are used to prosecute intellectual property crimes.

Thank You Weisbrod Matteis & Copley 35 Questions Slides/Article