Ex-Employee Escapes Economic Espionage Act

Addressing for the first time the Economic Espionage Act in a case involving stolen high-frequency-trading source code, the U.S. Court of Appeals for the Second Circuit held that a computer programmer’s theft and transfer of an employer’s proprietary source code did not constitute a criminal offense under either the Economic Espionage Act of 1996 (EEA) or the National Stolen Property Act (NSPA). U.S. v. Aleynikov, Case No. 11-1126 (2d Cir., Apr. 11, 2012) (Jacobs, J.) (Calabresi, J., concurring).

Under the EEA, 18 U.S.C. § 1832(a) it is a criminal 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, to the economic benefit of anyone other than the owner.” The NSPA, 18 U.S.C. § 2314 also makes it a federal offense for anyone to “transport, transmit, or transfer in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.”

The district court convicted Sergey Aleynikov, a computer programmer, of violating both the EEA and NSPA when he stole proprietary source code from his employer, Goldman Sachs, in an effort to develop a competing high frequency trading (HFT) system for his new employer. Goldman’s source code is a carefully guarded trade secret in its HFT system, which involves the execution of large trades based on rapid decisions made by complex algorithms for seizing fleeting markets opportunities. On his last day at Goldman, Aleynikov encrypted and uploaded Goldman’s HFT source code to a server in Germany, then downloaded the code to his home computer. Aleynikov later transferred the code to a laptop and flash drive which he took to his new employer. Aleynikov appealed his conviction.

On appeal, the 2d Circuit vacated the convictions under both the EEA and NSPA, finding Aleynikov was wrongly charged on both counts. Notwithstanding the evidence of theft, the Court held that stealing Goldman’s source code did not amount to espionage within the meaning of the EEA. The court reasoned that since Goldman’s HFT was used strictly internally and with no intention of selling or licensing it to anyone, the HFT system was not a product “produced for” or “placed in” the stream of commerce. As a result, Aleynikov was found not to have committed espionage under the EEA.

In vacating the NSPA conviction, the 2d Circuit joined several other circuits in relying on Dowling for the proposition that the theft and interstate transmission of purely intangible property is not subject to prosecution under the NSPA. Because Aleynikov stole purely intangible property embodied in a purely intangible format and since he did not “assume physical control” over anything tangible, i.e., goods, wares or merchandise, he was erroneously subjected to prosecution under the NSPA.

As noted by the 2d Circuit, Aleynikov was indicted on a third count under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030(a)(2), which was later dropped upon finding that Aleynikov did not exceed the scope of his authorization. Under the CFAA, authorized use of a computer in a manner that misappropriates information is not a federal offense. U.S. v. Nosal (see IP Update, Vol. 14, No. 5).