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How is the Venture Community Affected by the Criminalization of Trade Secret Law under the Economic Espionage Act?

VC Experts

It's a commonplace occurrence in Silicon Valley for skilled employees to move from one company to another, followed quickly by a civil trade secret lawsuit alleging that the employee stole trade secrets from his prior employer. Those lawsuits are troublesome and expensive enough when brought as civil matters. But recently there is a trend towards the criminalization of trade secret law on that makes the game significantly more dangerous.

Under the Economic Espionage Act, even the most run–of–the–mill trade secret case can be prosecuted as a criminal matter. Earlier this year I defended an 8–week criminal trial in federal court here in San Francisco, accusing a United States citizen of economic espionage because his engineering firm designed a titanium dioxide plan for Chinese customers, allegedly incorporating trade secrets belong to DuPont. The case went criminal when a disgruntled former employee sent an anonymous note to DuPont claiming that my client had "embezzled" trade secrets and was selling them to the Chinese government.

The facts bore little resemblance to the anonymous note. True, my client had retained a former DuPont engineer as a consultant, who provided sketches similar to some very old DuPont plants. But the sketches were also similar to the designs employed at every other titanium dioxide plant in the world, as well as designs depicted in hundreds of published articles, expired patents, textbooks and public disclosures over the last 50 years. In short, this was a case that would be an uphill battle for Dupont in a civil case, where they would have had to articulate how exactly their alleged "trade secrets" differed from the public disclosures in a crowded and antiquated field.

It was a different story in the criminal case. By charging the crimes of conspiracy and attempt, the government could avoid (under their view of the law) the obligation to show that anything was actually a trade secret, but could instead merely show that the defendants thought they were dealing with trade secrets. An Orwellian "thought crime," in other words. Discovery? Not a problem for the government: prosecutors were able to use search warrants to seize 5 terabytes of data from every a computer in the possession of my client at his home and business. From that massive stack of work product (miles high if printed out), the government found a handful of pieces of paper that were from DuPont and marked confidential. (Hardly a reliable indicator of trade secret status in a world where virtually everything not completely trivial is marked a "confidential" by most modern corporations). Clarity of trade secret allegations? There was no clarity, even after we won a motion for a "bill of particulars."

We were essentially left to defend the allegation, ridiculous on its face, that the entirety of a 50–year old chemical process (much of it based on equipment publicly available from third party vendors) was a trade secret. Even though our defense expert – who had spent 40–plus years in the titanium dioxide field — swore that nothing in the defendant's designs was really a trade secret, there was enough smoke for the jury to convict on the trade secret counts and for the court to impose a lengthy prison sentence.

What lessons here for the venture community?

First, the stakes have gone up for trade secret liability. Being wrong can be a crime.

Second, conduct that would seem completely normal in a civil litigation context can become totally distorted in the criminal arena. Going forward in the face of "intellectual property risk" may seem like a business judgment in day–to–day Silicon Valley, but in the midst of a criminal case, it may appear to be a decision to join a criminal conspiracy.

Third, be sensitive to the kinds of fact patterns that may appeal to prosecutors and be more likely to result in a criminal case. Right now there is a popular narrative that Chinese companies are intent on stealing trade secrets from American companies. A business model with a Chinese company premised on reverse engineering a popular American technology may be subject to increased scrutiny, rightly or wrongly.

Finally, get legal advice, early and often, when the facts may be susceptible to criminal exposure. This is an area in which fine lines abound, and being cautious and deliberate will pay off in the long run.

Stuart Gasner
Stuart Gasner is a Partner at Keker & Van Nest LLP in San Francisco where he centers his practice in the areas of white collar criminal and securities defense, intellectual property litigation and complex corporate disputes. His clients include venture capital firms and their portfolio companies, investment partnerships, and companies in industries ranging from biotechnology to semiconductors.