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UNITED STATES V. SPY : AN ANALYSIS OF THE DETERRENT EFFECT OF THE ECONOMIC ESPIONAGE ACT OF 1996 BY SARAH MOORE A THESIS Submitted to the Division of Social Sciences New College of Florida in partial fulfillment of the requirements for the degree Bachelor of Arts Under the sponsorship of Dr. Richard Coe Sarasota, Florida April, 2011
ii nr I am grateful for all the writers of espionage thr illers, from James Bond 007 to Mr. and Mrs. Smith. Those films and TV shows have entertained me four hours and fed my imagination with unthinkable plotlines and large r than life characters. They are the inspiration for this thesis. I have always loved s py movies and even considered a career in intelligence at one time. I wanted to somehow b ring excitement and romance to a rather dry subject and while this thesis isnt as e xciting as a James Bond film, I had a fleeting moment of joy when I figured out how to wr ite an economics thesis about espionage. There were a few people that were great cheerleade rs while I was writing this thesis. Mary Margaret McAdoo was a great support a nd always encouraged me to keep going. I would also like to acknowledge the effort s of Dr. Maribeth Clark. I desperately needed structure, accountability and guidance and s he gave me all that and more. Tara Lipscombe gave me her spare bedroom its true what Virginia Woolf said about a room of ones own. I needed a good comfortable spa ce to write and Im so grateful to her for that generosity. My parents were very supp ortive of my efforts as well. Without them I wouldnt have had access to medical care and would have never been able to get this project done. I would also like to thank Dr. Dror Paley for putting me back together again.
iii This thesis has taken longer to write than I expec ted. Over that time my vision for my future has changed. I am grateful to New Colleg e for the flexibility of their programs that allowed me to explore my interests. I have be en able to imagine myself in so many different kinds of careers but all those started wi th this degree I have earned at this school. I am so grateful for that opportunity.
iv r Acknowledgements................................... ................................................... .................................................iiTable of Contents.................................. ................................................... ................................................... .ivAbstract........................................... ................................................... ................................................... .....viiiIntroduction....................................... ................................................... ................................................... ......1Chapter 1: Legislative History of the Economic Espi onage Act.......................................... ......................5What is Intellectual Property?..................... ................................................... ............................................6Trade Secrets...................................... ................................................... ................................................... ..7A Growing Problem.................................. ................................................... .............................................11Ineffective Remedies............................... ................................................... ................................................13Mounting Losses.................................... ................................................... ................................................16Facts and FiguresVeracity and Sources of Data.... ................................................... .............................17Proposed Legislation............................... ................................................... ..............................................19Provisions of the Economic Espionage Act........... ................................................... .................................19Chapter 2: DeterrenceBecker and Beyond........... ................................................... ...............................22
v Trade Secret Theft and Economics................... ................................................... .....................................23The Need for Public Intervention................... ................................................... ........................................24Previous Evaluations of the EEA.................... ................................................... .......................................28What is Deterrence Theory?......................... ................................................... .........................................30Before Becker...................................... ................................................... ................................................... 31Beckers Economic Theory of Crime.................. ................................................... ...................................32A Mathematical Model............................... ................................................... ............................................34Probability of Punishment.......................... ................................................... ...........................................38Regarding Sentences................................ ................................................... ..............................................39After Becker....................................... ................................................... ................................................... .41Criticisms......................................... ................................................... ................................................... ...42Morality and Risk Preference....................... ................................................... .........................................46A Rational Informed Decision....................... ................................................... .........................................46Crime and Policy................................... ................................................... ................................................48Chapter Three: Applying Beckers Model: Does Crime Pay?.............................................. .................50The Big Picture: Aggregate Trade Secret Theft Befo re and After the EEA............................... ..............51Applying Beckers Model............................ ................................................... ...........................................55Methodology........................................ ................................................... ..................................................5 6Cost............................................... ................................................... ................................................... ......58Benefit............................................ ................................................... ................................................... .....59The Data........................................... ................................................... ................................................... ..60
vi The Deterrent Effect of the EEA.................... ................................................... ........................................64Circumstances Under Which the EEA Acts as a Deterre nt................................................. ......................66Measuring the Number of Offences................... ................................................... .....................................75Probability of Conviction.......................... ................................................... .............................................77Ideal Penalty...................................... ................................................... ................................................... .78The Hsu Case....................................... ................................................... ..................................................8 3Indications of Companies Likelihood to Report Infor mation Theft....................................... ....................85Globalization...................................... ................................................... ................................................... 86September 11, 2001................................. ................................................... ...............................................87The EEA and the Business Intelligence Industry..... ................................................... ..............................88Business Intelligence and Becker................... ................................................... ......................................100Conclusion......................................... ................................................... ................................................... ...103Appendix A......................................... ................................................... ................................................... .106The Economic Espionage Act of 1996................. ................................................... ................................106Section 1831. Economic espionage................... ................................................... ..............................106Section 1832. Theft of trade secrets............... ................................................... ..................................107Section 1833. Exceptions to prohibitions........... ................................................... .............................108Section 1834. Criminal forfeiture.................. ................................................... ..................................108Section 1835. Orders to preserve confidentiality... ................................................... ..........................109Section 1836. Civil proceedings to enjoin violation s.................................................. .......................109Section 1837. Applicability to conduct outside the United States...................................... ................109Section 1838. Construction with other laws......... ................................................... ...........................109Section 1839. Definitions.......................... ................................................... ......................................110
vii Appendix B......................................... ................................................... ................................................... .112Table of Figures................................... ................................................... ................................................112References......................................... ................................................... ................................................... ...114
viii UNITED STATES V. SPY: AN ANALYSIS OF THE DETERRENT EFFECT OF THE ECONOMIC ESPIONAGE ACT OF 1996 Sarah Moore New College of Florida 2011 r As technology has changed the global marketplace an d global politics focused as much on economic competition than political or mili tary battles, information has come to be the single most important factor in determining global leadership. The Economic Espionage Act (EEA) was passed in 1996 to protect t he US economy by deterring the increasing theft of proprietary information threate ning US corporations ability to compete in the global marketplace. This thesis use s Gary Beckers economic theory of crime to determine that sentences under this law do not appear to serve as a deterrent to trade secret theft. Additionally, aggregate data f rom the American Society of Industrial Security concerning the annual incidences of and mo netary losses due to trade secret theft is presented. While this data is inconclusive it ma y indicate that patterns of trade secret theft have changed since the passage of the EEA. I n order to further examine deterrence related to the EEA, memoirs written by industrial s pies were mined for content related to the information market. Accounts from these spies illustrate that the people caught for violating the EEA are not trained spies. Based on these accounts, it appears that intelligence professionals are highly skilled at av oiding detection and do not get caught.
ix Further, large corporations have so much to gain fr om industrial spying activities that the penalties offered by the EEA are not sufficient to deter them. The study concludes that the EEA serves as a deterrent to trade secret theft by penalizing conspiracy to steal trade secrets and attempted trade secret theft and that t he EEA is most effective at protecting smaller companies that do not have the budget to pr otect themselves through counterintelligence measures and whose secrets are not val uable enough to risk violating the EEA. Richard Coe Division of Social Science
1 The Economic Espionage Act (EEA) is significant bec ause it is the first federal law that made trade secret theft a crime. It provi des criminal penalties including greater jail time and higher fines than any previous civil or criminal law at the state or federal level for anyone stealing or conspiring to steal tr ade secrets (Dilworth, 2005). The law was passed in an attempt to deter trade secret thef t and incentivize innovation (Nasheri, 2005). This thesis addresses whether or not the EEA is an effective deterrent to trade secret theft. Chapter One contains a general overview of the hist ory of intellectual property law, particularly trade secret law. This section i s meant to provide some background on the trends in intellectual property law, specifical ly its evolution through consideration as a contract or tort or some other area of law (Bone, 1998, Lemley, 2008). This chapter reveals a detailed legislative history of the EEA. Also covered are events leading up to the passage of the EEA detailing how changes in glo bal politics and technological advancement necessitated a response by the federal government to protect economic interests of the United States. ( Congressional record senate 1995; Economic espionage act of 1996 : Report (to accompany H.R. 3723. 1996; HEARING ON ECONOMIC ESPIONAGE: 1996; Freeh, 1996; House Judiciary Commi ttee, 1996; National
2 Counterintelligence Center, 1995; Senate Committee on the Judiciary, 1996; Socolar, 1992) Chapter Two is based largely on Gary Beckers semin al article written in 1968, "Crime and Punishment: An Economic Approach, which introduces the basic economic model used by economists to analyze crime, punishme nt and the effectiveness of various aspects of the legal system. After Becker, there ca me a few criticisms and adaptations of the basic model and those will be introduced in bri ef, especially as they relate to the application of this theory to the EEA. In addition to deterrence theory, there is a body of literature concerning the costs and benefits of tra de secrets to society. These competing will be introduced as well, especially as they rela te to the historical context of the passage of the EEA ( Besen, 1991; Bone, 1998; Brenner & Cre scenzi, 2006; Hamdani, 2008; Lemley, 2008; Savage, 2000; Scholz, 1984; Schwartz, 2003; Simpson, 2005). Chapter Two also presents gaps in the literature where empi rical evidence would help clarify various scholarly theories regarding deterrence and trade secrets. Also discussed is potential bias in previous work in the area of trad e secret law reflecting interests they may be inclined to protect i.e., the American publi c, industry in general, American companies, the U.S. government, etc. Chapter Three introduces empirical evidence not pre viously used in academic literature relating to trade secret protection (Zwi llinger, 2000). Beckers economic theory of crime will be used to analyze data from all avai lable cases tried under the EEA. Statistics quantifying the value of trade secrets s tolen and sentences in every EEA case
3 tried since the act was passed that was not sealed by court order were gathered from Public Access to Court Electronic Records (PACER) d atabase. This database is a conglomeration of all the Federal Courts electroni c records, including the district and bankruptcy courts and is a complete record of feder al prosecution of cases tried under the EEA. Beckers model is used to analyze this data to determine that most sentences are not serving as a deterrent to trade secret theft; h owever there are some circumstances under which the EEA may have a deterrent effect on trade secret theft in the US. In addition to case analysis using Beckers theory, Chapter Three also introduces data collected by the American Society for Industri al Security (ASIS). This organization periodically collects data from a cross section of American businesses of all sizes. It is considered to be the most authoritative source of a ggregate data concerning trade secret theft (National Counterintelligence Center, 2003). The survey gives statistics about losses to American companies from misappropriation of trad e secrets regardless of whether they were reported to authorities or not (ASIS internat ional: About ASIS, 2010). Using ASIS data, this chapter explores the possibility that th ere is an aggregate effect on the incidence of trade secret theft by the passage of the EEA not exposed by the case data and Beckers model. This examination is inconclusive but it doe s expose a huge gap between the number of reported and tried cases of trade secret theft and the annual losses to trade secret theft with the comparison of the PACER data to the ASIS survey data. In the final part of this study of this study, ther e is a discussion of the information industry based on interviews and memoirs of industr ial spies (Achbar, 2003; Bucchi,
4 1999; Penenberg & Barry, 2000). These personal acco unts illuminate that the EEA is not meant to be a law that is effective through prosecu tion of cases of trade secret theft. The EEA rather serves to appropriate money in the annua l federal budget to protect US businesses with security resources such as the NSA, CIA and FBI.
5 nrr r n The EEA is the first and only federal law that crim inalizes misappropriation of trade secrets. It may seem obvious that stealing p roprietary information should be a crime. However, the process leading up to the pass ing of the EEA is the culmination of recent developments in the global socioeconomic cli mate that necessitate greater measures of protection for trade secrets. It can b e argued that information is more important to success in business than access to cap ital (Heffernan & Swartwood, 1993). As of 2008 it was estimated that as much as 80% of the assets of US businesses are intangible (Halligan, 2008). The increasing threat to proprietary information was determined to be vital to innovation, research and development and the expansion of the U.S. economy. This chapter will provide some backg round in intellectual property law and a brief legal history of the Economic Espionage Act from the early 1990s, when the need for a solution to the growing problem of trade secret theft became apparent, to its inception in 1996.
6 What is Intellectual Property? Intellectual property (IP) law in general deals with rights to buy and sell ideas and control how others use intangible things such as ar t, information and other results of human innovation and creativity, not the creations themselves (Lemley, 2008, Levine & Boldrin, 2008). There are two kinds of intellectual property: artistic and industrial. Art is usually covered under copyright while industrial ty pes of information or creations are covered under patent or trade secret law. Patents apply to inventions and grant temporary monopoly to the inventor to encourage innovation. Patents are appropriate for nonobvious inventions that have practical utility (Co oter, 2004). No one can legally use a patented idea without the permission of the patent holder even if they independently discover it. In contrast, a trade secret is a piec e of industrial proprietary information that is both valuable to and kept secret by a company (W IPO, 2004). Examples include but are not limited to client lists, recipes, products in the development stage before they would be patented, and business plans (Levine & Bol drin, 2008). Information is another term that can be used to d escribe intellectual property. One relevant characteristic of information is nonap propriability or nonexcludability, meaning that it can be distributed infinitely, not run out and that it is impossible to contain it in a tangible way. The rampant fileshar ing of music, movies and software is a prime example. These digital types of intellectual property are expensive to make but basically free to share and reproduce. It is also possible that the recipient of information can resell the information, only paying the cost of transmission. When this happens, the innovator is left with the full cost of production. It is possible that this type of replication
7 and redistribution of information could create a di sincentive to innovate. The market would then fall short of producing the efficient, o r optimal, quantity of information. In other words, according to Cooter, without regulatio n, there would be a shortage of science, music, art and inventions. IP law is a re medy for that problem (Cooter, 2004). As Lemley puts it, IP law allows inventers to sell their ideas, thereby incentivizing innovation (Lemley, 2008). Trade Secrets It is helpful to know some details of the evolution of trade secret law when trying to understand the historical context of the Economi c Espionage Act. Patent and copyright laws are longstanding in the tradition of IP law (Cooter, 2004). One of the earliest examples of trade secret protection was re corded over 2000 years ago in Rome. In this example, slave owners whose slaves might be bribed or intimidated into disclosing their secrets had a set of rules protecting those s laves. Later, in Europe from as early as the year 1000 during the earliest hints of the rena issance, the guild cartels had strict rules that, among other things, rewarded inventors, limit ed employee mobility, and penalized those who used secret processes and ideas without p ermission. These measures helped to decrease the possibility that proprietary informati on would be leaked. During the Industrial Revolution there were cases involving tr ade secret theft despite the guild rules, notably Frances 1660 kidnapping of skilled Swedish ironworkers in an effort to learn their competitors technique (Lemley, 2008).
8 Trade secret law is based partially in common-law t orts, partially in employment law, and later, by the 1980s, viewed as a combinat ion of property and contract law. So trade secret misappropriation has traditionally bee n seen as a conglomeration of breach of confidence, breach of confidential relationship, co mmon-law misappropriation, unfair competition, unjust enrichment, trespass and unauth orized access to plaintiffs property (Lemley, 2008). A trade secret claim, civil or criminal, must conta in three basic elements: value, secrecy and theft. Think about the words trade se cret misappropriation. If the creation in question is to qualify for trade secret protecti on, each of the three words must be relevant to the case. The piece of information m ust be valuable or at least potentially valuable. Second, the plaintiff must have taken re asonable precautions to keep it a secret. This means it must be a private piece of informatio n not generally known in the industry. The rationale for the secrecy requirement is somewh at confusing. Perhaps it is the hallmark of value for demonstration that effort has been made to keep a piece of information secret infers that piece of information has value, otherwise it would not be worth the effort to hide it. Another rationale for the secrecy requirement is that it may serve as an indicator that the defendant acquired t he information wrongfully. The logic is that if one lets people see something they cannot l ater claim it was a secret. But still, the law requires that some precautions be taken, whatev er reasonable happens to mean on any given day, even if they the precautions are not effective. Another possibility proposed by Lemley is that the secrecy requirement serves as a filter so that information that is patentable or may be copyrighted does not q ualify for trade secret protection
9 (Lemley, 2008). The final element of a trade secre t misappropriation is that the information be acquired wrongfully. This concept i s also not well defined making trade secret cases open to interpretation. Usually trade secret cases come about in three different ways: competition, business transactions and employment. Reverse engineering and independent development are permitt ed as is not the case with a patent (Lemley, 2008). While some intelligence gathering is expected in no rmal business operations, there is a point at which investigating the operati ons of competitors is unacceptable. There is currently a thriving business intelligence market where trained spies are hired to look into the affairs of a clients competitor. Th ese business intelligence operatives operate just inside the provisions of the EEA and o ther laws protecting intellectual property. For example, in an interview on the docu mentary The Corporation, Marc Barry describes a scenario where a spy may pose as a headhunter and contact someone known to have access to privileged information. Th e operative would stage a job interview and manipulate the candidate into discl osing proprietary information belonging to their current employer while they are attempting to document their experience with what they believe to be a potential new employee (Achbar, 2003). He also mentions in an interview published on commondr eams.org that it is common to sift through garbage to look for information about the a ctivities of a clients competitor. This type of intelligence gathering is not considered to be economic espionage. In this interview he is very candid about the nature of the relationship between him and the fortune 500 companies that hire him. The fact that he is an independent contractor gives
10 the CEOs plausible deniability if he gets caught cr ossing the line into illegal territory. He does not provide any specific examples of how he mi ght do that in the work he does (Mokhiber & Weissman, 2001). Later in Chapter 3 th is paper will examine the work of Marc Barry and other business intelligence professi onals as it relates to deterrence of misappropriation of trade secrets. A hallmark case that defines how business intellige nce gathering crosses the line from acceptable methods to unacceptable is hallmark 1970 case DuPont v. Christopher. In this situation, the Christophers took aerial photos of the DuPont f actory under construction. This action was deemed a misappropri ation of trade secrets even though there was no law against flying a plane over the co nstruction site and taking pictures. Judge Goldberg felt that the Christophers actions were distasteful enough to warrant a decision in favor of DuPont (Lemley, 2008). The re ason this was a landmark case in trade secret law is that the Cristophers had no con tract to breach. There was no tort in this situation because the flying of the plane was not in itself illegal. The only thing left was the right to the trade secret itself (Friedman, Landes, & Posner, 1991). It is only a recent development that misappropriat ion of trade secrets is viewed as a crime in the United States. After the landmark case of DuPont v. Christopher there came various legal remedies for dealing with the ne wly defined tort of trade secret misappropriation. Over the next decades, as techno logy began to play a greater role in the economy, the risk that innovation be stifled al so started to grow.
11 A Growing Problem By 1996 it was apparent that an effective legal sol ution to the growing problem of economic espionage and misappropriation of trade se crets was needed and a number of hearings were held before Congress to discuss the s ituation (Ashcroft, 2002). At that time Louis Freeh testified before Congress that 23 foreign countries were suspected of involvement in stealing trade secrets from American businesses. The Federal Bureau of Investigation was investigating 800 cases of statesponsored theft of proprietary information from U.S. corporations (Fischer, 2001). The Economic Espionage Act was the federal governments response to the rapid chan ges brought about by a more relaxed political climate that came with the dismantling of the Soviet Union and communist Europe, globalization and new technology that contr ibuted to a marked increase of trade secret theft evidenced by Freehs testimony. Freeh also testified that since the end of the Col d War in 1991, trade secret theft by foreign agents has been on the rise. As the thr eat from behind the Iron Curtain dissipated, intelligence resources in many countrie s were diverted toward economic rather than political interests. Spies from around the world were gathering intelligence from American business interests rather than milita ry activities (Nasheri, 2005). In 1985, the CIA began a program. As early as the 1980s, Fra nces General Directorate for External Security had an industrial security unit t hat was tasked with stealing secrets on behalf of French corporations (Penenberg & Barry, 2 000). At the same time, with the technology boom there has been a shift in the world economy toward greater research and development. At that time the United States was le ading the world in research and
12 development spending over $249 billion a year in fe derally sponsored programs funding research endeavors (Fischer, 2001). The House Judi ciary Committee cited a study by the Brookings Institute that indicated that between the years 1982 and 1992 the portion of US companies tangible assets of mining and manufactur ing dropped from 62 to 38 percent, making intangible assets such as trade secrets more valuable. Advances in technology such as email, disk drives, digital cameras and oth er digital capture and communication methods make information like client lists or plans for product development easier to steal. Thousands of pages can fit on a small thumb drive. Information is also easily copied so the owner may never be aware of its theft until it appears for sale on the market by a competitor. By then it would be too late to e ffectively employ any of the existing legal remedies, civil or criminal, especially if th at competitor is a citizen of a foreign nation and cannot be easily prosecuted (House Judic iary Committee, 1996). In many foreign countries, especially those in Asi a but also Israel, Russia and France to name a few, there is little delineation b etween industry and government (Freeh, 1996). According to Milton Socolar from the Comptr oller Generals Office in his testimony before the House of Representatives, the FBI estimates the Russians saved billions of dollars, as well as many years on resea rch and development, through state sponsored industrial espionage. He testified that many countries are using their intelligence resources to spy on American business for the purposes of stealing trade secrets and that American corporations are not equi pped to detect professional spies on their own. He gave the example of the French Secre t Service stealing information from the United States and Russia to allow a French comp any a competitive edge in
13 negotiations for a billion-dollar contract to supply India with fighter jets. In his testimony, Freeh gave further examples of U.S. corp orations losing hundreds of millions of dollars when employees of U.S. corporations have sold proprietary information regarding everything from cameras to pharmaceutical s. Socolar claimed that because the United States does not officially engage in economi c espionage it is at a disadvantage in the global economy. He advocated passing legislati on that would criminalize trade secret theft in order offer some protection for American b usinesses against this threat to as a way to mitigate this global economic disadvantage ( Socolar, 1992). Ineffective Remedies Prior to the passage of the Economic Espionage Act the U.S. government did provide some support to industry through counterint elligence measures that provided known potential victims of trade secret theft with a warning. FBI partnered with ASIS making the heads of their counter-terrorism taskfor ce members of ASIS in an effort to protect US economic interests but their efforts wer e thwarted by lack of appropriate legal remedies to increasing losses (Longmore-Etheridge, 1995). At the time of the hearings before Congress that laid the groundwork for the EE A in 1995, there were other laws on the books that the FBI attempted to use to investig ate and prosecute trade secret theft. The federal legislation applicable to trade secret misappropriation at the time was ineffective and therefore resources were used inves tigating cases that could not be won. The Interstate Transportation and Stolen Property A ct are prime examples of federal
14 criminal legislation that were sometimes unsuccessf ully used to attempt to prosecute cases of trade secret theft. When this act was pas sed, its intent was to prosecute criminals who transport tangible property across state lines. Because of the language in the act, intellectual property and proprietary information w as not protected. Due to the language used in the law, the FBI could not use it to prosec ute cases involving theft of information (Brenner & Crescenzi, 2006; Fischer, 2001). The Ma il Fraud Act and the Fraud by Wire statutes had also been used to prosecute federal tr ade secret theft cases. However, for these statutes to apply, the theft must have taken place through the mail system or through the use of wire, radio or television. This is another example of a law containing outdated language that cannot be used to prosecute the more modern techniques commonly used in trade (Brenner & Crescenzi, 2006). Another shortcoming of these laws is the lack of protection from further damage for the victims. There was no provision for protecting victims from further discl osure of their information during the discovery phase of a trial which made it very diffi cult to obtain the cooperation of victims in these trials (Fischer, 2001). The Computer Secu rity Act of 1987, which compels the NSA and Commerce Department to protect sensitive da ta which is not classified protects against a similar threat as economic espionage. Th e Computer Security Act however, is not comprehensive enough to cover all cases of trad e secret misappropriation either (Socolar, 1992). Federal prosecutors had, on occas ion, declined FBI requests to investigate cases because there were not statutory grounds upon which to base the investigation (Freeh, 1996). Like federal criminal legislation at the time, state criminal laws are also inadequate when it comes to addressin g trade secret theft. Only a few
15 states have criminal laws against such activities a nd those are usually misdemeanors and rarely enforced. It was also pointed out in the he arings that states do not have the resources to investigate and prosecute theft of pro prietary information, especially when it is carried out by a foreign government. There are some civil laws that address these instan ces of trade secret theft as torts or breaches of contract. Civil litigation is often useless due to an inability to enforce a judgment against a foreign entity. (Brenner & Cresc enzi, 2006; House Judiciary Committee, 1996) There have also been civil cases t ried under the Uniform Trade Secrets Act (UTSA). IBM, Honeywell Corporation, Eastman Ko dak, 3M Corporation, AT&T and General Electric all sought remedies that way. An example of the ineffectiveness of that piece of legislation is that in January of 199 7, General Motors was awarded $100 [sic] in their civil action which can hardly be con sidered a deterrent to trade secret theft or an incentive for victims to prosecute. They did not even cover the cost of litigation. The main advantage of the UTSA, a federal level civ il code, over common law which is enforced at the state level, is its provision for t he injured party to recover damages from a third party not initially named in the suit (Nasher i, 2005). A number of criminal cases involving theft of pro prietary information that provide further evidence of the governments inabil ity to protect American businesses from trade secret theft prior to the passage of the EEA (Brenner & Crescenzi, 2006). None of these cases were resolved in such a way to satisfy the victim or the FBI and Attorney Generals Office. For example, in 1993, a n automobile air bag engineer stole
16 manufacturing designs, plans and strategies from a competitor. He reached a plea agreement and served less than six months in prison for stealing company secrets valued at half a million dollars. In another case, the de fendant stole $10 million to $20 million worth of computer chip technology from Intel and pa ssed it to Iran, Russia, China and Cuba. He received a thirty-three month sentence an d his wife was granted immunity. The FBI was aware of his activities but had to wait to arrest him until he had violated an applicable statute. Nashiri details further such examples of cases where the FBI was aware of theft of trade secrets worth millions of d ollars and could do little about it (Nasheri, 2005). Mounting Losses During the mid-1990s Congress deliberated over the issues concerning the theft of trade secrets and how to best go about constructing legislation that would address those issues. It was clear that government support to U S industry was insufficient to combat trade secret theft. Furthermore, in sub-committee hearings and later as a whole, members of Congress determined that theft of trade secrets had the potential to have a significant negative impact on the US economy and was therefore a threat to national security (Freeh, 1996). In his February 28, 1996 testimony before a joint hearing of the Senate Judiciary and Intelligence Committees on the threat of economic espionage to the United States, FBI director Louis Freeh stated that there had been a 100% increase--from 400 to 800-of suspected economic espionage cases since t he inception of the FBIs Economic
17 Counterintelligence program two years prior. These losses are due to increased administrative costs, legal activity, loss of marke t share, embarrassment to the company, increased security costs, decreased product life, i ncreased research and development costs, among other potential harms to a victim of t rade secret theft (Heffernan, 1991). Due to the increased resources devoted to investiga tion of economic espionage both by law enforcement and general climate of incr easing corporate awareness, it cannot be known whether there was an increase of economic espionage or just and increase in detection. Either way, Freeh believed there needed to be a law to address it (Senate Committee on the Judiciary, 1996). He urged lawmak ers to institutionalize the concept that economic security is an integral part of natio nal security in his testimony before the Senate (Freeh, 1996). Facts and FiguresVeracity and Sources of Data In his testimony, Freeh cited a survey by the Ameri can Society for Industrial Security claiming that there is no other data with such detail as that collected by ASIS regarding trade secret theft and losses to U.S. com panies (House Judiciary Committee, 1996). Examples of alternative figures include a study done from 1980 to 1990 indicating that US losses to Japan were valued at $ 1.2 trillion. Another study placed US drug firm losses to foreign countries at $1.2 billi on annually due to counterfeiting medicines (Fischer, 2001). Intel suffered a loss o f chip technology valued at $ 300 million with a research and development budget of $ 1.6 billion in 1996 (Fischer, 2001;
18 Freeh, 1996). On January 25, 1995 the US Senate re ported that of economic espionage among Fortune 500 companies had grown 260 percent o ver the previous year by extrapolating data from the ASIS survey (Congressio nal record Senate, 1995). At that time, ASIS data indicated that US businesses were l osing approximately $2 billion per month to economic espionage. The number of reporte d incidences had increased 323 percent in four years from 9.9 to 32 incidents per month (Freeh, 1996). It is possible that the cost of corporate spying ma y be considerably higher than reported. At the time of the hearings there was so me debate about the accuracy of various sources of available data regarding losses to U.S. corporate interests due to trade secret theft. ASIS is not an independent source of information but rather funded by its members, who are the participants in the survey. T his fact was cause for concern to many members of Congress and later those studying t rade secret theft in academic circles, because it suggests a possibility of bias in that data. Some dissidents believed there might be an incentive for ASIS members to exa ggerate their losses (ASIS international: About ASIS, 2010). On the other ha nd, it is well known that companies are highly motivated to protect their image and are resistant to disclose vulnerabilities (Cooter, 2004). This is because a company can suf fer further losses in addition to the theft of the trade secret by reporting it through a reduction of market share and reduced confidence on the part of investors (Nasheri, 2005) Because of this obvious influence on companies motivating them not to disclose their exp eriences with proprietary information loss, the data from ASIS was accepted as a fair rep resentation of trade secret losses to American businesses.
19 Proposed Legislation With this information came the proposal of the Econ omic Espionage and Protection of Proprietary Information Act of 1995 w hich would eventually become the Economic Espionage Act. On October 11, 1996 in hi s Statement on the Signing of the Economic Espionage Act of 1996, President Clinton s aid the Economic Espionage Act is intended to protect the trade secrets of all busin esses operating in the United States, foreign and domestic alike, from economic espionage and trade secrets theft and deter and punish those who would intrude into, damage or steal from computer networks." It is not intended to stifle competition but rather to pr otect confidential information (Dilworth, 2005, Carr et al, 2000). The purpose of my researc h is to determine whether the EEA has met the goal stated by Bill Clinton. Does the EEA serve as a deterrent to trade secret theft? Provisions of the Economic Espionage Act The EEA has two main provisions. Provisions in § 1831 deal with economic espionage, or trade secret theft for the benefit of foreign governments. Those in § 1832 cover domestic trade secret theft. In these sectio ns, the terms are defined and it is made clear what the government must prove for prosecutio n under that section.
20 The penalties in §1831 are twice those in §1832 an d unlike §1832 there is not a requirement in §1831 that the government prove the defendant intended to use the trade secret for economic benefit, intended injury to the owner or that the trade secret was related to a product in foreign or domestic commerc e (Senate Committee on the Judiciary, 1996). In §1835 Congress sought to address the potential p roblem of the trade secret being revealed during the course of the trial. It creates an exception to federal discovery rules in an effort to preserve confidentiality. Th is provision is also meant as an incentive for victims to report trade secret theft. It is ea sier to guarantee confidentiality when the defendant is charged with conspiracy rather than ac tual theft because conspiracy involves proving intent while theft requires proof that ther e actually was a trade secret (Dilworth, 2005). The EEA also provides for the forfeiture of proceeds and property used to commit the crime. It was anticipated that the EEA would i ncrease the amount of forfeiture receipts and penalties by about $10 million per yea r. As mentioned above, there have just recently been new developments in the enforcement of the EEA. In the past few years ther e have been both the first successful prosecution under §1831 and the first maximum penal ty given during sentencing under the EEA. These landmark cases have the potential t o affect trade secret theft in two different ways. One, the stiff penalty and success ful prosecution under § 1831 may serve as an increased disincentive for would-be thieves. The other possible effect is to instill
21 confidence in victims of trade secret theft. These fall outside the scope of this study, however. In order to examine this hypothesis data from ASIS quantifying the aggregate losses to U.S. businesses over time to trade secret theft in an attempt to see if there is an impact on those losses as a result of the EEA is pr esented and analyzed. Also, Beckers Economic Theory of Crime and Deterrence as well as later critiques of that work is the framework used to analyze the deterrent effect of t he EEA against misappropriation of trade secrets. Data from the Unites States Courts P ublic Access to Electronic Records (PACER) database cataloguing cases tried under the act and use deterrence theory to analyze that data and determine whether the EEA sen tences would qualify as a deterrent to trade secret theft according to Beckers theory. This analysis reveals that in spite of the EEA case outcomes falling short of Beckers cri teria for deterrence, the EEA does play an important role in protecting US businesses from trade secret theft.
22 !"#$$The legislative history in the first chapter descri bes the insufficient civil remedies to trade secret theft. The increase of trade secre t theft came about as a result of shifts in the political landscape and technological advances. Still the basic framework economists use to study criminal law is applicable. The passa ge of the EEA is a perfect example of how economists describe societies need for crimina l laws in the first place1. Richard Posner said that despite the practical importance of trade secrets to the business community, the law of trade secrets is a neglected orphan in economic analysis. (Friedman, Landes, & Posner, 1991) This thesis exa mines the EEA using the general framework used in economic analysis of crime that w as pioneered by Gary Becker in 1968. It examines economic theory surrounding cri me as an industry as a macrocosm and assumes this theory translates direct ly to supply and demand for trade secret theft and penalties surrounding it. This chapter gives a brief overview of the literatu re that follows economic theory from its roots in consideration of the interactions between offenders and law enforcement to a more complex market model. It also explains h ow this work in the general area of For a thorough discussion of the insufficiency of t ort law in general, the necessity of criminal law a nd the economics of crime and punishment, see Cooter chapt er 11.
23 economics and crime is relevant to the EEA. It int roduces the model used in Chapter Three to evaluate the EEA by economic standards. It also provides an overview of how scholars in other fields have evaluated the EEA and their opinions as to its efficacy. Trade Secret Theft and Economics While the purpose of tort law is to restore the vic tim to their original condition prior to the tortious act, criminal law is meant to have an effect on society as a whole (Cooter, 2004). The intent of the EEA was to punis h thieves and deter future incidences of trade secret theft (National Counterintelligence Center, 1997) and tort law alone with its aim being restitution did not affect such a cha nge. So evaluation of the EEA must examine whether or not the sentences handed down do more than compensate the victim. A sanction must injure the perpetrator of the crime enough so that it serves as a deterrent to future crime. The following discussion of econo mic theory describes how the data collected from EEA cases, from ASIS surveys and acc ounts from professional business intelligence can describe the effectiveness of the law as a deterrent to trade secret theft. There is a possibility that industrial espionage ma y, despite its illegal status, contribute positively to the global economy. This possibility would be relevant to public policy if the case could be made the economic espio nage does no harm to society as a whole, especially if it is true that all involved p arties ultimately benefit from the practice. Shira Breziz points out that it is possible that ec onomic espionage may be good for
24 countries economies because it encourages the flow of information. This argument falls along the lines of the general argument for an effi cient free market. (Brezis, 2008) Two other studies by Whitney2 uses game theory to demonstrate proof that economi c espionage benefits all parties including the compet itors and the public. In this game theory study, Whitney makes the case that it should be allowed under all circumstances (Whitney, 1996; Whitney, 1999). This is but an exa mple of an age old debate. Economists have produced arguments on both sides of whether or not it is beneficial for governments to intervene in markets since the dawn of the discipline. The question then becomes, whose interests do you want to protect and what are you willing to sacrifice in terms of efficiency in order to protect them? Whil e efficient technology transfers may be of ultimate benefit to consumers worldwide, it is n ot as clear that competing firms and nations as economic competitors universally benefit from economic espionage. For the purposes of this study it is accepted based on the following arguments that harm is done when trade secret theft occurs. The Need for Public Intervention A simple example of how the public and private inte rests overlap is given by Charles Clotfelter in his paper Private Demand for Public Services. According to Clotfelter, Publicness of public goods will deter mine the shift of public funds to For the details of this game theory model, see Whit neys article Economic Espionage as Strategic Trad e Policy nrr
25 provide for such services with the ideal situation being a combination of the two (Clotfelter, 1977). His general example of a publi c goodthe police, and a private goodburglar alarms, work in concert to provide optimu m security for society for crime prevention. In Ann Bartels Firm Demand Against C rime, she describes how a firm will invest in measures of protection against crime just as they would in any other business cost of production. These studies show th at firms demand for public protection for protection against crime increases as their cos ts to protect themselves become prohibitive (Bartel, 1975). It is generally accept ed that in the absence of adequate law enforcement, private vigilante groups or other priv ate substitutes for law enforcement will form (Cook, 1980). However, in the case of lo sses to trade secret theft, it is shown that in some cases individual firms are better off stopping production than protecting themselves (Bartel, 1975). The aggregate effect of many firms making this decision would be disastrous to the US economy (Economic esp ionage, technology transfers, and national security: 1997) As explained in Chapter One, the increased losses t o US businesses as a result of trade secret theft in the early 1990s were reaching a point where businesses could not effectively protect themselves. The intellectual p roperty losses created a disincentive to innovation. The governments of competitors using i ntelligence resources to steal trade secrets created a situation where foreign trade sec ret thieves had the advantage of economies of scale over domestic competitors. By p assing the EEA Congress offered the resources of the US government to protect those sec rets from would be thieves.
26 However, they did not go as far as to officially al low for US government intelligence resources to spy on foreign competitors. A firms decisions about general factors of product ion are traditionally described with the Cobb Douglas production function model ada pted by Bartel to demonstrate losses due to criminal activity: X = AMT X = Output M = Labor input T = Entrepreneurs time A = total factor productivity and are the output elasticities of labor and entrepreneurs time, respectively. These values are constants determined by available technology. In this variation of the Cobb Douglas production fu nction Bartel assumed that capital is irrelevant in the short run (Bartel, 1975). She us es this expression in conjunction with the following loss equation: L = L (Le X) In this expression total loss is a function of exog enous losses due to various vulnerabilities such as technological changes as we ll as total output. It is a simple mathematical illustration that shows how losses are a function of output. The intuitive
27 basis for her argument is that if firms do not inve st in research and development for widgets, the plans for said widgets cannot be stole n and thereby the firms avoid suffering the loss from developing a product they cannot prof it from. In other words, if they do not make it, it cannot be stolen. It is this mechanism that created the problem of disincentive to innovation faced by legislators at the time of t he passage of the EEA. In order for Congress to encourage firm output, they had to affe ct a decrease to their losses that were coming as a result of trade secret theft. Without this intervention making the protection of trade secrets a partially public good, domestic firms faced losses to the extent that they could be forced not to produced, thereby threatenin g the entire US economy. In a more general sense economists are concerned wi th harm caused by crime where, in this example introduced by Becker, the am ount of harm is a function of the number of offenses demonstrated in the following ex pression: Hi = Hi (Oi ), with Hi= dHi /dOi > Oi
28 These formulas illustrate that for any positive num ber of offenses; the amount of harm done by those offenses is positive and increases as the number of offenses increases. The total amount of harm done to society also decreases as the number of offenses decreases. So the purpose of any criminal law is to reduce the number of offences so as to reduce the harm to society (Becker, 1968). The specific incen tive mechanism that brings about this aggregate reduction of the number of offenses is re ferred to as deterrence. Previous Evaluations of the EEA Economists have not published empirical studies of EEA per se. There have been a few articles written about its efficacy as a dete rrent and influence on the business intelligence industry by non-economists. These art icles are written primarily from the perspective of legal scholars in the field of IP la w or business intelligence professionals. In his winter 2000 article, The Economic Espionage Act: Bear Trap or Mouse Trap, Chris Carr outlines the legislative history of the act and highlights a few cases talking about the secrecy requirement and issues of trade secret disclosure via discovery during the course of the trial. His major point of contention with the EEA was the lack of protection for the confidentiality of trade secrets and how it poses a disincentive for companies to report trade secret theft. Carr does some case law analysis and contrasts a few sentences with the value of the trade secret in those cases. Carrs criticism of these sentences comes from what he sees as a lack of suit able punishments in light of the severity of the crimes (Carr et al., 2000).
29 Legal scholars have criticized the EEA because of i t gives control of the continued privacy of sensitive information to the g overnment rather than the owners of trade secrets. Because of this lack of control, Ha lligan proposed amendments to the EEA to allow for additional civil causes for action tha t would give companies more control over their privacy not allowed in a criminal procee ding thus encouraging more EEA cases (Halligan, 2008). Another complaint by lega l scholars is that the EEA does not protect software companies from peer to peer filesh aring (Rustad, 2006). Nasheri points out that there is not enough data on trade secret t heft and that ASIS surveys alone are insufficient to analyze the problem (Nasheri, 2005) The EEA has been used somewhat rarely compared to t he hundreds of trade secret investigations the FBI claims to have open on any g iven year. Since the Al Qaeda attacks on September 11, 2001, there has been a diversion o f federal resources toward fighting terrorism, which may account for the lack of trade prosecutions since then (Fink, 2002). Although about a hundred and twenty cases have been tried under the EEA, few are particularly noteworthy. When found guilty, the sen tences of such criminals are lax compared to the amount of damage the defendants cou ld have done to their victims. Because many of the cases involve conspiracy charge s rather than actual theft, there is not restitution ordered. Because the EEA is rarel y applied, there are only a few cases that present and resolve would-be issues involved i n its enforcement. The evidence in most of the cases tried was so overwhelmingly indic ative of guilt that there was no doubt that the prosecution would prevail. They were sett led with plea agreements and there were few appeals (United States Courts, 2011).
30 What is Deterrence Theory? In economics, deterrence theory is the concept that potential and actual offenders respond to incentives and that the supply of and de mand for offences respond for those incentives. It is generally accepted by sociologis ts and behavioral psychologists that human behavior is based on rewards and punishments. In the words of Jeremy Bentham, the profit of the crime is the force which urges a man to delinquency: the pain of the punishment is the force employed to restrain him fr om it. If the first of these forces is greater the crime will be committed: if the second, the crime will not be committed (quoted in (Cook, 1980)). Becker restated this con cept saying, " some persons become 'criminals' not because their basic motivation diff ers from that of other persons, but because their benefits and costs differ" (Becker, 1 968). So when it comes to crime, both positive and negative incentives are considered for all the actors involved. This means the government, the public, potential and actual cr iminal and victims all have a part to play and it is assumed that rational self-interest guides their behavior (Cooter, 2004). The cornerstone of deterrence theory was first introduc ed by Gary Becker (Becker, 1968) and
31 explored by others3 since, ceteris paribus a higher expected sanction will reduce the crime rate Before Becker At the time Becker published his article in 1968, e conomic thought on crime and punishment was limited to more general philosophy w ithout a mathematical framework. For example an overview of crime and punishment pub lished in the New Palgrave Dictionary of Economics shows that Adam Smith wrote that the accumulation of property affected both the demand for crime and protection f rom crime. William Paley studied factors responsible for differences in the probabil ity and severity of sanctions for different crimes. Jeremy Bentham the famous father of utilitarian philosophy wrote about the motivations for offenders' behavior and the opt imal response by the legal authorities (Blume, Durlauf, & Palgrave Macmillan, 2008). Beck ers article provided a mathematical framework that has allowed economists to go on to study crime and law using econometrics and economic theory. For a background article on deterrence theory, see Palgrave Dictionary of Economics (Ehrlich, 2008). Deterrence theory has been explored in depth by Erl ich and others cited in that article. Cook also pr ovides a thorough overview of deterrence theory (Cook, 198 0)
32 Beckers Economic Theory of Crime Gary Becker begins his paper by outlining reasons h ow crime in general can be looked at as an industry and outlines its economic impact. Industrial espionage is the under the table version of the multi-billion busine ss intelligence industry (Penenberg & Barry, 2000). The distinction between the two is t he means by which the intelligence is gathered and who facilitates it (Nolan, 1999). Bec ker looked at the overall financial impact of crime on society and sought to come up wi th a model that represented the relationship between the values of various factors in crime. These factors consist of losses to victims, gains to criminals, foregone gai ns to criminals that opt to commit a crime instead participate in a legal income generat ing activity, the number of offenses, the number of times criminals are punished, and the costs of enforcing the law and the private expenditures on protection from crime (Beck er, 1968). Becker looked at the overall financial impact of cr ime on society and sought to come up with a model that represented the relations hip between the values of various factors in crime. These are losses to victims, gai ns to criminals, foregone gains to criminals that opt to commit a crime instead partic ipate in a legal income generating activity, the number of offenses, the number of tim es criminals are punished, the costs of enforcing the law and the private expenditures on p rotection from crime (Becker, 1968). Gary Beckers economic model of crime relies on the basic premise that the supply of offenses is a function of the probability of apprehension, the punishment upon conviction and other variables such predisposition to crime, alternative sources of
33 income, hassles involved in being arrested and so f orth (Becker, 1968). This idea is represented in the following expression: O = O (p,f,u) where O is the number of offenses supplied, p is the per offense probability of conviction, f the per offense punishment and u the portmanteau variable representing a blend of all other factors. According to Beckers theory, an in crease in either the probability of conviction or in the amount of punishment would lea d to a decrease in the expected utility derived from the offense and thereby reduce the number of offences supplied4. Beckers theory seeks to explain the interaction be tween law enforcement and criminals. The impact of the probability, severity and type of criminal sanction on offenders is believed to determine the future behav ior of potential offenders. The market model of crime, as described by Ehrlich (E hrlich, 2008) in later examination and expansion of Beckers work, addresses the inter action between potential offenders, potential victims and public authorities. Offender s are considered to be suppliers of 4 While chapter two explores alternatives to Beckers theory, this is the theory used for empirical anal ysis of the EEA in the third chapter of this paper.
34 crime and victims and consumers of criminal activi ty are both indirect demanders of crime (Becker, 1968). In Becker (1968), equilibrium is achieved just thro ugh the interaction between offenders and law enforcers. In reality, other part ies are involved as well: consumers or patrons of illicit goods and services in specific c rimes, and potential victims. These parties determine the direct or derived demand for specific illegitimate activities. Public intervention "taxes" the incidence of crime through its interaction with both the supply and demand sides of the market (Ehrlich, 1996). A Mathematical Model This thesis uses the mathematical model developed by Becker to represent the decision-making process for would be criminals. Th e model assumes the informed rational actor will commit a crime if the payoff or utility derived from the crime is greater than that of not committing it (Eide, 2006) By using units of utility in his model, Becker acknowledges that the payoff for a crime may be non-monetary. However, this study will only consider monetary gains and losses due to trade secret theft. According to Beckers model, the expected utility E[U] derived f rom committing an offense is: E[U] = PU(B C) +(1 P )U(B)
35 where U(x) is the individuals adapted Neumann-Morg anstern utility function, P is the subjective probability of receiving a sanction, B i s the income generated from committing the crime and C is the sanction. According to this model, if the expected utility is positive, an offender will commit a crime and if it is negative, he will not (Eide, 2006). While this model uses units of utility, the model i s applicable for units of dollars later in Chapter Three. Within the context of deterrence theory, punishmen ts are said to be effective deterrents of the expected punishment which is disc ounted by the probability it will occur is still greater than the expected utility derived from committing the offense (Cooter, 2004). This concept can be represented graphically Figures 1 and 2 reprinted from Cooter show graphs where the severity of punishment is on the vertical axis and the seriousness of the offense on the horizontal axis. The 45 degree line represents perfect disgorgement in both graphs. Perfect disgorgement occurs when the sanction is exactly equal to the severity of the offense. This is the standard for civil laws which seek to repair the harm done by the offense but not usually to punish offenders or deter future occurrences. Perfect disgorgement would be equal t o the amount of restitution owed for a stolen trade secretcompensation to the victim fo r the loss they experienced (Cooter, 2004).
36 Figure 1: From Cooter; Severity of the punishment as a function of the seriousness of the offense Figure 1 illustrates a case where there is an opti mum level of law enforcement. The top curve represents the sanction. The 45 degr ee line is perfect disgorgement where the punishment would exactly fit the crime. The bottom curve represents the expected punishment when the probability of apprehe nsion is taken into account. Sanctions in this case are high enough that even wh en discounted by the probability those sanctions will be imposed, the expected punishment is still greater than the expected
37 benefit of committing the crime and these sanctions would, according to Beckers model, deter future crimes (Cooter, 2004). Figure 2: Also from Cooter. This graph differs fr om Figure 1 in that the expected punishment is less than the benefit for x1 through x2. Figure 2 shows conditions where sanctions would not serve as a deterrent to crime. From x1 to x2 the expected punishment is lower than the level of perfect disgorgement. For offenses in this range, expected sanctions would no t deter theft of trade secrets (Cooter,
38 2004). Chapter Three will use this model with actu al EEA data to explain the circumstances under which the EEA does and does not serve as a deterrent to trade secret theft. Probability of Punishment The probability of punishment in Beckers model is only relevant to the extent that the potential criminal is aware that it exists The perception of the probability of punishment is really more relevant than the actual likelihood of apprehension and conviction. In Beckers model, the amoral rational criminal is considered to be fully informed. This is unlikely due to imperfect commun ication channels for information about arrests and sentences. Cook points out that c riminologists with access to crime statistics have difficulty calculating accurate pro babilities of apprehension and conviction for various types of crime. Given this fact it unl ikely that criminals are fully informed as Beckers model assumes. He postulates that it is p ossible that a few newsworthy cases or the conviction of a friend or relative may catch th e attention of potential criminals and serve to shape their perception of their likelihood of success in participation in a criminal act (Cook, 1980). Trade secret theft is similar to other white collar crimes in that it is not a crime of passion. Normally crimes of passion are easier to prosecute than white collar crimes because they involve personal relationships (M. R. Geerken & Gove, 1975). Trade secret theft, unlike other white collar crimes, also invol ves personal relationships usually
39 between employers and employees or people with othe r business ties. These relationships necessary to commit trade secret thef t make it unique and increase the probability of conviction unlike other theft crimes There was only one EEA case where the motive was obviously not profit based (United S tates Courts, 2011) but several other cases were thrown out because the value of the trad e secret was so low that the case did not meet the rational actor criteria this study as sumes no rational person would commit trade secret theft for less than an expected benefi t of $10,000. Considering that trade secret theft is asserted by lawmakers to be carried out by business intelligence professionals it is possible that these potential criminals did some sort of risk analysis in planning their crimes as t hey would for other types of business planning. When the EEA was passed, the Secretary o f State informed foreign governments of its existence (Penenberg & Barry, 20 00) making the assumption of a fully informed trade secret thief, especially those agents of foreign governments that were of concern to legislators all the more likely. Regarding Sentences Economists are interested in how people perceive va rious sentences. The sanction is only valuable as a deterrent to crime in as much as it influences would be perpetrators decisions about whether or not to commit a crime. Figures one and two reprinted from Cooter illustrate how the perceived probability of punishment influences the deterrent effect of sentences. If the sentences are too ligh t and the perceived probability of
40 punishment drops below the perfect disgorgement lin e, the rational actor would choose to commit the crime (Cooter, 2004) Further complicating the deterrent effect of senten cing is the tendency of people to discount future events. For example year of fre edom is more valuable n-1 years from now than n years from now (Block & Heineke, 1975). The same goes for future losses or payments. People tend to view immediate payoffs as more valuable than future promises of payments. The further in the future the event, the more it is discounted. Generally when considering the cost of crime, econo mists do not view the sanction as a singular cost consideration. Reputat ion is another factor to be considered in the incentives on a would-be trade secret thief. N ot only is there the risk of public exposure at trial but one usually loses his reputat ion as an honest citizen upon conviction, especially if it is a serious crime an d his legitimate skills tend to become "rusty" if not outdated in a rather short period of time (Block & Heineke, 1975). Opportunity cost is usually of significant interest to economists because if a criminal is to spend time looking for opportunities for crime they must forego legitimate income (Becker, 1968). For example, someone who could be working as a waiter instead walks the street as a prostitute and gives up the opportu nity for tips for more lucrative tricks, presumably considering the probability of receiving a sanction to be acceptably low and having no moral qualms about his choice. Similarly a potential carpenter may instead sell drugs on the street. Crimes like embezzlement tax evasion and trade secret theft do not carry such opportunity costs (Cook, 1980). The se crimes are committed throughout
41 the course of legitimate income producing activitie s and therefore do not require the sacrifice of legitimate income. After Becker Deterrence theorists concern themselves primarily w ith three questions: what factors cause criminals to commit crimes; which asp ect of punishment is a more effective deterrent-certainty or severity; and what effect th reat of punishment for one type of crime has on involvement in other types of crime (Cook, 1 980). Much of the work after Becker is concerned with the various factors that make up the portmanteau variable u This makes sense intuitively. Becker says that the prob ability of any given crime trade secret theft for example, occurring, is made up of the probabilities of a number of other factors and the most significant of these are the p robability and magnitude of the potential penalty. One can also expect the level of offenses to change as a result of changes in the factors that make up u For example, if the availability for legal incom e rises, then the level of offenses would drop or if the population b ecame more educates and thereby more law abiding, then the number of offenses would also drop. If the punishment is nonmonetary and includes time in prison, the number of offenses will also drop temporarily due to incapacitation but will rise again as pris oners are released to re-offend (M. Geerken & Gove, 1977).
42 Criticisms Since Beckers paper was published in 1968, it has come under some criticism for a number of reasons. Generally in Beckers model, probability and magnitude of fines are seen as independent variables. There is some e vidence that this may not be the case. It has been observed that juries are less likely to convict as penalties become stiffer. So what may be considered to be a reasonable doubt cha nges depending on whats on the line. This study shows that unless the severity of punishment varies with the severity of the crime, there will not be a deterrent effect as a result of the punishment. (Andreoni, 1991) In Beckers model, the expected sanction is the pr obability of punishment multiplied by the expected fine. As this number go es up the crime rate is expected to fall. However, there is some research that indicates that the crime rate is itself a factor in determining the probability of punishment (Bar-Gill & Alon Harel, 2001). The overload or crowding effect describes a rising cr ime rate that reduces the probability of detection as law enforcement resources are spread t hin. There are other less noted possibilities where the increased crime rate may in crease the probability of detection due to high concentrations of crime creating economies of scale. The crime rate can have a positive or negative effect on the expected sanctio n as well. It is possible that a higher frequency of a certain kind of crime would destigma tize it thereby decreasing the penalty. Or, the higher frequency could incur the wrath of t he public and cause an increase in the penalty. If the crime is completely destigmatized for a segment of the population due to a
43 difference in cultural norms, the perceived sanctio n could also be lower (Bar-Gill & Alon Harel, 2001). Then there are the rates of different types of crim e. For example, if the police are investigating a high profile murder case, they may not pursue a purse snatcher. But if there was a string of purse snatchings and one was finally caught then the penalty may be particularly high due to angry purseless jurors (Ba r-Gill & Alon Harel, 2001). Theoretically, one would expect the effects of cert ainty and severity to supplement each other; however, the interaction of certainty and severity appears to be quite complex. At least in our society, this is in part because high severity is associated with low certainty and vice versa (Logan, 1972; Bai ley and Smith, 1972). A study by Fees and Wohlschlegel indicates that juries are les s likely to convict when the penalties are higher because they are more afraid of making a mistake. So, at the penalty increases, the probability of conviction decreases. In optimal deterrence, fines increase as the quality of the legal system increases. Qual ity is defined as the amount of available evidence, etc. This is directly related to expendi tures on law enforcement (Feess & Wohlschlegel, 2009). However, according to a study conducted by Geerken and Grove, evidence indicates that certainty is more important than severity of punishment in deterring crime (Geerken & Gove, 1977).
44 Savitz and Scheussler found that the death penalty does not deter homicide (Geerken & Gove, 1977) so it was assumed based on t his previous research that punishment did not deter crime. This assumption w as later refuted by Tullock (Tullock, 1974). Additionally, there is evidence from survey data that punishment deters crime (Geerken & Gove, 1977). Tullocks argument is simp le. He asserts that downward sloping demand curves demonstrate how increasing co sts will produce fewer incidences of crime (Tullock, 1974). Heineke developed an alternative to Beckers model where an individuals income is said to be derived from the sum of exogen ous income, legal and illegal and illegal activities (Eide, 2006). Ehrlich and other s have studied this model5. While this model is of theoretical interest to economists, it has no policy implications and is not relevant to this discussion of deterrence and the E EA. Becker and others6 have concluded that the optimal punishment is the maximum sentence. However, Andreoni argues that juries are less likely to convict when they know the punishment will be more severe. Therefore the probability of conviction would decrease as the certainty of a larger punishment in creased. (Andreoni, 1991) In his paper titled Reasonable Doubt and the Optimal Magnitude of Fines: Should the Punishment Fit the Crime?, he says A more thorough examination of time allocation, mo netarization and choices related to criminal activi ty as well as a general discussion of more detailed th eoretical work related to deterrence can be found i n Erling (Eide, 2006) Also see Stern ( 1978), Furlong ( 1987), and those they cite. Similar arguments have been used in the literature on tax evasion (Kolm, 1973; Christiansen 1980) and employee monitoring (Lazear, 1979).
45 Jurors are very sensitive to the potential penaltie s that defendants may pay, with higher penalties leading t o lower probabilities of conviction (Vidmar, 1972). This e ffect is evident in recent econometric studies on the deterr ent effect of penalties that show that higher penalties reduce the number of convictions (Snyder, 1990; Andreoni, 1991 ), and it is consistent with a great deal of anecdotal evi dence relating to the sometimes counterproductive effects of minimum sentence requirements (Lachman, 1981) (Andreoni, 1991) In contrast to Becker, he disagrees with the notion of marginal deterrence and suggests an inverse relationship between the severi ty of punishment and the probability of conviction. Trade secret cases are so far not t ried by jury but rather settled with plea agreements (United States Courts, 2011). Deterrenc e based on these sentences would be only effective on potential trade secret thieves p erception of risk and not the psychology of juries. In light of these facts, this research in opposition to the conclusions of Becker et al would not be relevant to the existing EEA cas es. However, Andreoni argues that his model can be generalized even with cases that are s ettled with plea agreements because those agreements are reached based on perceptions o f jury behavior (Andreoni, 1991). This study rejects that assumption because there ha s not been any jury behavior to model assumptions on for the outcomes of EEA cases. Andr eonis point is interesting upon later examination of EEA data because he argues tha t the punishment should fit the crime, meaning that optimum deterrence would be rea ched if punishments increase as the severity of the crime increases, rather than as Bec ker argues, a maximum penalty is issued for every offence (Andreoni, 1991; Becker, 1 968). Andreonis model fits actual
46 EEA sentences in contrast to Beckers proposed spec ulative maximums in his economic theory of crime. Morality and Risk Preference Assuming that all potential criminals are amoral an d risk-neutral is a huge leap. Economists do recognize that there are individuals that are risk-averse and that individuals differ with respect to their honesty p reference. Moral concerns do in some cases guide human behavior and provide exception to profit motive. Further, there are differences among individuals interpretation of pot ential profits and sanctions. For example, an arrest may be of little consequence to an uneducated, unemployed person whereas that same arrest would be devastating for a college economics professor. There is also recognition that criminals differ in their circumstances that afford them the opportunity to commit certain crimes that may require access to skills or other opportunities (Cook, 1980). In the case of trade s ecret theft, a person must have access to a trade secret if they are to steal it. A Rational Informed Decision Beckers rational amoral decision maker is aware of the potential risks and benefits of both criminal and legal activities and makes a decision to participate in the one that benefits him the most. Critics of Becker s model hold that the assumption of full
47 rationality is unrealistic (Geerken & Gove, 1977); however Cook defends the assumption of rationality saying that it may generate valid pr edictions. He says that the assumptions of full information and rational choice can be rela xed and still the fundamental argument that an increase in the threat of punishment will s till reduce crime.7 Cook concludes that while the relationship between an individuals perc eption of a threat and his decision to commit a crime is of theoretical interest, that the ultimate measure of aggregate deterrence as a result of the criminal justice syst em is the crime rate before and after a policy change (Cook, 1980). Also, a study presente d by Gibbs indicates that there is considerable evidence that criminals are more likel y than the average citizen to know the statutory penalties for specific crimes. Further, this study indicates that criminals are no more likely than the average citizen to underestima te the probability of punishment (Gibbs, 1968). Beckers idea of a perfectly inform ed criminal is another that has been heavily criticized. In Beckers model, it is assumed that these rationa l potential criminals have perfect knowledge of their potential costs and bene fits of criminal activity and its alternatives. There is no evidence of this and no studies have been done on how criminals gather information (Cook, 1980). Cook as serts that in order to have an accurate model of deterrence, a model of threat communicati on describing how potential criminals interpret their odds of getting caught mu st be developed (Cook, 1980). For a full discussion of rationality, the threat co mmunication process and criminal behavior, see Coo k p. 220
48 Cooks analysis is particularly relevant to trade se cret theft and is therefore accepted by this study as a basis for using Becker s theory to evaluate the EEA. Trade secret theft is not a crime of passion in most case s. Even though available cases in the PACER database do not involve professional spies or government agents, these crimes are committed by people who are intimately connecte d to their respective industries and aware of the value of the intellectual property the y stole (United States Courts, 2011). In summary, there are substantial reasons for believin g that potential trade secret thieves are motivated by the potential reward and are aware of the potential risks, and thus the conditions necessary for a deterrent effect demonst rated by Beckers model by the EEA exist. Crime and Policy Variations in punishment for one type of crime can affect the incidences of other types of crime. Given limited law enforcement reso urces, an increase in allocation of resources to one type of crime brings with it a nec essary reduction in the resources devoted to other types of crime (Cook, 1980). When economists study law enforcement they consider types of crime as substitutes or c omplements for each other. In general, there is a great deal of crime switching a mong criminals. For example, robbery, burglary, and auto theft are substitutes for each o ther. An increase in law enforcement for auto theft may deter auto theft and bring about an increased number of robberies (Cook, 1980). The cases examined in the PACER data base indicated that those arrested
49 for EEA violations were first time offenders and no t inclined to commit other types of crime (Cook, 1980) therefore trade secret theft is not, for example, a substitute for auto theft. From a policy standpoint, this means that a llocating resources to enforcing trade secret laws will not likely encourage would be trad e secret thieves to participate in other types of illegal activities. However, as a complem ent to other types of crime, the necessary reduction of law enforcement attention to those crimes may lead to a decrease in the probability of those other types of crimes r esulting in a sanction. This is particularly relevant to the shift in the federal l aw enforcement landscape that came about as a result of the terror attacks that occurred in the US on September 11, 2001. In Chapter Three, further analysis will be presented s howing the possibility of a shift in federal law enforcement away from economic concerns to focus on potential terrorist threats.
50 n$%r&"r '(Chapter Two was a discussion of deterrence theory a nd as well as previous qualitative analyses of the Economic Espionage Act. In this chapter Beckers model is applied to EEA cases to determine if it functions a s a deterrent to trade secret theft. First, aggregate data on the incidence of trade secret the ft in the United States over the past twenty years is examined and compared the frequency and severity of trade secret theft before and after the EEA was passed. Then Beckers model is applied to actual EEA cases as well as data collected from memoirs of pro fessional spies to see if the incentives provided by these cases explain the aggregate data. Also discussed are the various other factors determining a potential trade secret thief s perception of the probability they would be convicted of trade secret theft and how th ose factors may amplify or detract from the deterrent effect of the EEA.
51 The Big Picture: Aggregate Trade Secret Theft Befo re and After the EEA As was explained in Chapter One, prior to the passa ge of the EEA the problem of trade secret theft was growing at a rate that was o f great concern to American businesses and lawmakers. A combination of increasing technol ogy, globalization and the end of the Cold War in the early 1990s created a problem t hat states and individual companies could not handle on their own with existing remedie s available at the time. A comparison of dollar losses and number of incidents before and after the passage of the EEA is presented to demonstrate whether the legislation is an effective deterrent to trade secret theft. In 1995, when the EEA legislation was being drafted Congress relied heavily on reports from ASIS to determine the degree of the pr oblem of trade secret theft and the necessity of a federal criminal law to address it. ASIS International is a private organization of security professionals. ASIS publis hed data on trade secret theft trends periodically since 1991 in either Security Magazine or in more detail in their Trends in Proprietary Information Loss Survey Reports8. The ASIS surveys collected data on trade 8 All but the most recent in partnership with Price Waterhouse Cooper and the last two were not conduct ed by the original authors, Richard Heffernan and Dan Smartwood so there is some variation on the data reported by these surveys depending on who conducte d them making it difficult to compare from year to year.
52 secret theft9 from what they believe to be a cross section of bu sinesses in the United States. These reports were used by Congress when t he EEA was passed to demonstrate the rising problem of trade secret theft and contin ue to be relied upon in Annual Reports to Congress regarding the problem of economic espio nage. Since 1955, when ASIS was founded, the organization has been involved in educ ation and facilitation of a variety of security interests. Because ASIS is a group of sec urity professionals representing the interests of owners of intellectual property, they are not the ideal source of information. The government has not conducted any of their own r esearch on the incidence of trade secret theft in the US and ASIS is the only source of this type of information. ASIS surveyed their members anonymously asking ques tions about information loss. They had a response rate of between 15 and 3 0 percent depending on the year. The following is a comparison of data reported by ASIS before and after the EEA was passed. 9 Most of those losses reported resulted from legal fees and lost revenue associated with the theft of privileged information. Areas affected included re search and development, customer information and financial data ( Trends in proprietary information loss, 2002)
53 Year % Companies Annual Losses* 1991 37 None reported 1993 49 $10 1995 40 $12 1997 56 None reported 2001 40 $55 2007 63 $60 Figure 3: Data from ASIS International surveys rel ated to their respective years. *Losses are in bil lions of US dollars. Figure 3 shows the percentage of companies reportin g they experienced an incident of trade secret theft and the extrapolated losses10 to US businesses for that year. On first glance it appears that the EEA lacked effi cacy. The percentage of companies experiencing incidents and the dollar losses to U.S businesses are continuing to increase. 10 These estimations come from unreported incidence s of trade secret theft and many companies do not assign a dollar value to their intellectual propert y until they are in litigation. This means the val ues reported to ASIS were many time nothing more than a rough guess. (Trends in proprietary information loss, 2002)
54 Further examination of data from the ASIS surveys i ndicates a different interpretation. In the 1993 and 1995 surveys, just before the passage of the EEA, the number of per month incidences11 of trade secret theft reported to ASIS rose 260% a nd 325% respectively. After 1995, the last survey bef ore the EEA, the rate has not even doubled in ten years (Trends in Proprietary Informa tion Loss 2002; Trends in Proprietary Information Loss 2007; ASIS International: About A SIS 2010; Heffernan & Swartwood, 1993; Heffernan & Swartwood, 1996; Longmore-Etherid ge, 1995; Swartwood & Heffernan, 1998; Swartwood & Heffernan, 1998; Heffe rnan, 1991). This indicates that the rate of increase of trade secret theft is slowi ng down. Given that the major contributing factors in the ad vent of the trade secret misappropriation problem are globalization, increas ed reliance on technology and computerization, a reduction of the rate of increas e of trade secret theft is significant. The global economy is not static in those areas. I t is possible that measures takes for protection of proprietary information in the US are effective. It would, however, be premature to attribute the reduction of the rate of increase in incidences of trade secret theft to the passage of the EEA alone. Private eff orts to protect proprietary information 11 The ASIS surveys do not use a uniform reporting period so the percentages of companies reporting losses in each survey are not reporting those losse s over the same period of time. The ASIS survey re ports consistently refer to the reporting period but th e length of the reporting periods is not uniform fr om survey to survey. They vary from a calendar year t o odd multiples of months. Also, each survey does not have the same number of respondents but they have r eported their data in numbers of incidents rather t han percentages in some cases but not others making it difficult to interpret their findings and compare s urveys. It was most useful to break their data into inciden ts per company per month if it wasnt already done and then get an annual figure for the average company f rom there in order to compare the number of inciden ts per year before and after the EEA was passed.
55 are also increasing as companies are more aware of the problem (Nolan, 1999)(Curtis & Carter, 2011; DeGenaro and Associates, 2011; Societ y of Competitive Intelligence Professionals, 1999; Strategic and Competitive Inte lligence Professionals, 2011). Applying Beckers Model Another way to look at the question of whether or n ot the EEA acts as a deterrent to trade secret theft is to think about whether the individual cases themselves reveal anything about the effectiveness of the EEA. Accor ding to Becker, a rational actor performs a simple comparison between the cost and b enefit of a crime in order to decide whether to commit the crime. Beckers model says a rational criminal will commit a crime if the benefit outweighs the cost. The benef it to the thief would of course be the value of the trade secret and the cost would be the sanction if caught. Each of these figures is discounted by the probability they will occur. Beckers model predicts that a rational thief would consider these factors and mak e a decision based on which outcome benefits him the most. A person or corporation wou ld commit trade secret theft if the benefits of doing so outweigh the potential negativ e consequences. Below is the algebraic manipulation of Beckers formula solving the probability of conviction:12 12 This is the formula for column 4 of figure 5.
56 (1 p) B > pC B Bp > pC B > pC + Bp B > p (C + B) B / (C + B) > p commit crime where B is the value of the trade secret, C is the sanction and p is the probability of conviction. The bottom line shows conditions favor able for a rational criminal to choose to commit a crime where the potential benefit outwe ighs the possibility of receiving a sanction. Methodology In order to study the effectiveness of the EEA, dat a was gathered from federal court records from cases of trade secret theft that was relevant to Beckers model. Beckers model uses the cost of committing the crim ethe sanction, the potential benefit the value of the trade secret both to the victim and to the potential thief, and the probability of receiving a sanction. The PACER dat abase contains records that contain this information. This study makes use of this inf ormation and Beckers model to determine whether the EEA is a deterrent to trade s ecret theft.
57 There have been about 120 EEA cases nationwide sinc e the law was passed fifteen years ago (Krotoski, 2009). The records of these cases are maintained by the federal district court in which the case was tried. Each of the 94 United States federal district courts keeps their own separate records. The PACER database system is an interface to federal court databases, each maintain ed separately by federal bankruptcy, appeals and district courts. Each court decides wh at, if any information is available through the PACER system. Public access to these d atabases is controlled by a centralized federal government office charged with the responsibility of collecting fees in addition to other administrative tasks but they do not control what information is available or so the availability of court documents varies from district to district. Each of the federal courts records was searched fo r information pertaining to the value of the trade secret and the sentence for EEA cases. This information was usually found in the sentencing memorandum, the original co mplaint or final judgment for each case. In some cases these figures could not be obt ained from court documents in the PACER database because the case was sealed.13 Any case for which complete data could not be obtained was not included in the data set. 13 It is possible to petition each court under the Fr eedom of Information Act for information pertaining to EEA cases and there may have been information on mo re cases available that way. However, this method would have been costly and prohibitively time consu ming.
58 Cost The sentence imposed by the court is considered to be the penalty or cost to the thief. There are other costs associated with defend ing accusations of trade secret theft including travel, lost wages, attorney fees, etc. b ut since there was no way to obtain these figures for each case or and the possible range for estimates was so vast, those figures were left out of these calculations. Some allowanc e for these expenses was made when calculating estimates for p in the case of a maximum sentence in the fifth col umn of Figure 5. In order to calculate p all penalties were converted to dollars. The gen erally accepted dollar value for prison time has been esti mated to be between $1,500 and $2,000 per month (Waldfogel, 1995). Because this study wa s done in 1995 and because court documents found in PACER indicate that trade secret thieves are generally well educated and have higher than average salaries, the higher f igure of $2,000 was used. When converting probation and house arrest sentences, a figure of $200 per month was used. This is an approximation of the fees charged for th ese sentences (Waldfogel, 1995). No adjustment was made for the inconvenience of probat ion or house arrest or any other costs associated with the case, although the inconv enience of these sanctions could be considered a disincentive to trade secret theft. D ata from any corporate sentencing or the §1831case was not included as these carry higher pe nalties than §1832, the portion of the statute governing trade secret theft by individuals There was not a large enough sample size of these cases to study them separately.
59 Benefit The benefit to the thief is the amount of money th e secret is worth to the thief and not necessarily the amount it is worth to the victi m. For example, if the victim lost $10M in revenue and had spent $10M to develop their widg et, their loss would be $20M even if the thief was going to sell the widget for only $10 0,000. Regardless of the damages to the victim, the potential benefit in this case woul d only be $100,000. Cases where the value of the trade secret to the thief was less tha n $10,000 were thrown out. The rationale for this exclusion is that none of Becker s supposed rational actors would commit a felony for less than $10,000. Therefore t here must be some other motive for the crime not relevant to this study. Losses to victims are relevant to the analysis of the EEA. Perfect disgorgement occurs when those losses are repaid but nothing mor e (Cooter, 2004). In the scenario described in the above paragraph, perfect disgorgem ent would be $20M. In the legal system, this is referred to as restitution. Punish ment is any sanction that is greater than perfect disgorgement and is meant to injure the off ender. Perfect disgorgement, punishments and potential benefits to trade secret theft are illustrated graphically later in this chapter to further explain how the EEA works a s a deterrent.
60 The Data The following chart shows data collected from the P ACER database as well as algebraic manipulations of that data using Beckers economic model of deterrence.
61 Case NameYear Potential Benefit Sanction Sanction Plus Restitution Perfect Disgorgement P corp ind .75B/.25 Alcaron2007 700,000.00 $ 81,450.00 $ 156,450.00 $ 75,000.00 $ 0.90 0.12 0.58 2,100,000.00 $ Ameri2002 1,405,694.00 $ 73,900.00 $ 1,479,594.00 $ 1,405,694.00 $ 0.95 0.22 0.74 4,217,082.00 $ Burnstein, Clinton2006 6,939,600.00 $ 8,100.00 $ 6,947,700.00 $ 6,939,600.00 $ 1.00 0.58 0.93 20,818,800.00 $ Camp et al1998 15,000.00 $ 25,500.00 $ 33,000.00 $ 7,500.00 $ 0.37 0.00 0.03 45,000.00 $ Campbell1998 100,000.00 $ 20,000.00 $ 22,800.00 $ 2,800.00 $ 0.83 0.02 0.17 300,000.00 $ Chang2000 60,000.00 $ 90,100.00 $ 150,100.00 $ 60,000.00 $ 0.40 0.01 0.11 180,000.00 $ Chilowitz2007 27,000.00 $ 6,325.00 $ 33,325.00 $ 27,000.00 $ 0.81 0.01 0.05 81,000.00 $ Corgnati1999 120,000.00 $ 10,100.00 $ 130,100.00 $ 120,000.00 $ 0.92 0.02 0.19 360,000.00 $ Cotton2008 250,000.00 $ 54,100.00 $ 69,100.00 $ 15,000.00 $ 0.82 0.05 0.33 750,000.00 $ Davis1997 1,250,000.00 $ 60,100.00 $ 70,100.00 $ 10,000.00 $ 0.95 0.20 0.71 3,750,000.00 $ Dorn2002 15,920.00 $ 4,100.00 $ 20,020.00 $ 15,920.00 $ 0.80 0.00 0.03 47,760.00 $ Grande2007 3,000,000.00 $ 17,600.00 $ 17,600.00 $ $ 0.99 0.38 0.86 9,000,000.00 $ Hallsted, Pringle1998 75,000.00 $ 170,000.00 $ 170,000.00 $ $ 0.31 0.01 0.13 225,000.00 $ Hsu, Ho1997 4,000,000.00 $ 16,100.00 $ 4,016,100.00 $ 4,000,000.00 $ 1.00 0.44 0.89 12,000,000.00 $ Keppel2002 800,000.00 $ 230,100.00 $ 2,230,100.00 $ 2,000,000.00 $ 0.78 0.14 0.62 2,400,000.00 $ Kern1999 3,500,000.00 $ 34,000.00 $ 34,000.00 $ $ 0.99 0.41 0.88 10,500,000.00 $ Kim2008 190,000.00 $ 46,300.00 $ 235,000.00 $ 188,700.00 $ 0.80 0.04 0.28 570,000.00 $ Krumrei1999 350,000.00 $ 58,100.00 $ 58,100.00 $ $ 0.86 0.07 0.41 1,050,000.00 $ Lange1999 8,000,000.00 $ 69,085.00 $ 69,085.00 $ $ 0.99 0.62 0.94 24,000,000.00 $ Meng2004 7,000,000.00 $ 64,200.00 $ 64,200.00 $ $ 0.99 0.58 0.93 21,000,000.00 $ Min2006 181,000.00 $ 70,100.00 $ 84,567.00 $ 14,467.00 $ 0.72 0.03 0.27 543,000.00 $ Pampa (Norelli et al.) 2002 240,000.00 $ 16,100.00 $ 256,100.00 $ 240,000.00 $ 0.94 0.05 0.32 720,000.00 $ Petrolino2001 9,000,000.00 $ 4,100.00 $ 4,100.00 $ $ 1.00 0.64 0.95 27,000,000.00 $ Rashidi2005 50,000.00 $ 34,100.00 $ 34,100.00 $ $ 0.59 0.01 0.09 150,000.00 $ Rector2000 50,000.00 $ 28,200.00 $ 28,200.00 $ $ 0.64 0.01 0.09 150,000.00 $ Serebryany2002 25,000,000.00 $ 28,100.00 $ 28,100.00 $ $ 1.00 0.83 0.98 75,000,000.00 $ Shearer/Tejas1999 7,000,000.00 $ 60,500.00 $ 60,500.00 $ $ 0.99 0.58 0.93 21,000,000.00 $ Shiah2006 75,000.00 $ 28,100.00 $ 28,100.00 $ $ 0.73 0.01 0.13 225,000.00 $ Sindelar1998 16,618.00 $ 10,100.00 $ 26,718.00 $ 16,618.00 $ 0.62 0.00 0.03 49,854.00 $ Sun2002 3,000,000.00 $ 50,100.00 $ 50,100.00 $ $ 0.98 0.38 0.86 9,000,000.00 $ Trujillo-Cohen1997 337,000.00 $ 100.00 $ 337,100.00 $ 337,000.00 $ 1.00 0.06 0.40 1,011,000.00 $ West2008 1,000,000.00 $ 11,100.00 $ 11,100.00 $ $ 0.99 0.17 0.67 3,000,000.00 $ Worthing1997 100,000.00 $ 29,100.00 $ 29,100.00 $ $ 0.77 0.02 0.17 300,000.00 $ Yang, Four Pillars1996 800,000.00 $ 151,500.00 $ 2,151,500.00 $ 2,000,000.00 $ 0.84 0.14 0.62 2,400,000.00 $ Ye2002 1,750,000.00 $ 7,600.00 $ 7,600.00 $ $ 1.00 0.26 0.78 5,250,000.00 $ AVG2,468,509.49 $ 47,661.71 $ 546,955.97 $ 0.84 0.20 0.49 7,405,528.46 $ Figure 4: The PACER data and calculations.
62 Column one of Figure 4 contains the names of the of fenders14. Column two contains the year the case was filed. Column three contains esti mated value of the trade secret to the thief. Column four contains the sanction ordered b y the court. Column five contains the value of the sanction added to any restitution or f orfeiture ordered by the court. Column six contains the perfect disgorgement figure the a ctual loss to the victim, if any. Column seven contains the threshold probability o f conviction necessary to deter trade secret theft for that case based on the sanction an d value of the trade secret represented by the following formula: P = B / (C + B) where C is the sanction for that case from column f our of Figure 4 and B is the estimated value or benefit of the trade secret to the thief. Column eight is the threshold probability the necessary perceived probability o f conviction to deter a criminal act-if the maximum sentence had been issued for a corpo ration. Column nine is the threshold probability if the maximum sentence for an individu al had been imposed. Column 10 contains the necessary sentence to deter trade secr et theft if the probability of conviction is .25. Average values for their respective column s can be found in the bottom row of Figure 4. These cases would officially be references as the U nited States v. Case Name and can be found listed as such in the PACER database or other court record s.
63 A potential trade secret thief may perceive their p enalty in a number of ways. The potential penalty could be considered to be either the maximum sentence for individuals under §1832 of the EEA or the average penalty for s imilar crimes based on sentences already imposed by the courts. These scenarios are displayed in the fourth and fifth columns of Figure 4 respectively. It is also possi ble the perceived penalty could be the penalty from a single well publicized EEA case. All EEA penalties were converted into dollars.15 The maximum prison term for individuals provided by the EEA is 10 years valued at $24,000 per year. This yields a monetary value for that prison term of $240,000. T he maximum fine is for individuals committing domestic trade secret theft is $250,000. An additional $10,000 was added the value of the sentence as a conservative estimate of additional potential costs associated with conviction. Therefore, $500,000 is the adjust ed dollar value for the maximum sentence for individuals provided by the EEA §1832. The maximum penalty for corporations is $5M as reflected in the calculation for the threshold probability in column eight of Figure 4. Figure 4 containing the calculations the final data collected from the PACER system reveals that the EEA does not appear to dete r trade secret theft. The sentences imposed in EEA cases would require an average proba bility of conviction of .84 as shown in the bottom of column four of Figure 4. Th is means that based on the average 15 The widely accepted view that the future value of a prison sentence is discounted was not considered i n these calculations.
64 values of the trade secrets and sanctions, a fully informed potential trade secret thief would violate the EEA unless he was almost certain he would be caught and convicted The Deterrent Effect of the EEA Deterrence can be represented graphically following the models presented in Chapter 2:
65 Figure 5: Graph of actual punishments for all EEA cases
66 This graphical analysis of the EEA16 in Figure 5 also reveals that sentences are not sufficient to act as a deterrent to trade secret th eft. Figure 5 illustrates EEA sentences graphically in a similar way to the graphs in Figur es 1 and 2 from Chapter Two of this study. Figure 5 shows a scatter plot of EEA senten ces against a perfect disgorgement line based on the losses to victims of trade secret thef t in these cases. Most EEA sentences on the graph are at or significantly below the perfect disgorgement line. Based on Beckers theory, ideal sentences should be above the line to allow for discounting based on a potential trade secret thiefs perceived probabilit y of receiving a sanction. Circumstances Under Which the EEA Acts as a Deterre nt Further examination of EEA data collected from PAC ER reveals that there may still be some ways in which the EEA acts as a deter rent to trade secret theft. Cases of attempted trade secret theft or conspiracy to steal trade secrets reveal a potential deterrent to trade secret theft. Further, the EEA is also po tentially more effective in cases where the trade secret is less valuable than the maximum penalty provided under the EEA. 16 The Serebryany case was omitted from the graph as a statistical o utlier for illustrative purposes due to the extremely high $25M value of the trade secret. Thi s omission will continue in future graphs.
67 Case NameYear Potential Benefit Sanction Perfect Disgorgement P corp ind .75B/.25 Grande2007 3,000,000.00 $ 17,600.00 $ $ 0.99 0.38 0.86 9,000,000.00 $ Hallsted, Pringle1998 75,000.00 $ 170,000.00 $ $ 0.31 0.01 0.13 225,000.00 $ Kern1999 3,500,000.00 $ 34,000.00 $ $ 0.99 0.41 0.88 10,500,000.00 $ Krumrei1999 350,000.00 $ 58,100.00 $ $ 0.86 0.07 0.41 1,050,000.00 $ Lange1999 8,000,000.00 $ 69,085.00 $ $ 0.99 0.62 0.94 24,000,000.00 $ Meng2004 7,000,000.00 $ 64,200.00 $ $ 0.99 0.58 0.93 21,000,000.00 $ Petrolino2001 9,000,000.00 $ 4,100.00 $ $ 1.00 0.64 0.95 27,000,000.00 $ Rashidi2005 50,000.00 $ 34,100.00 $ $ 0.59 0.01 0.09 150,000.00 $ Rector2000 50,000.00 $ 28,200.00 $ $ 0.64 0.01 0.09 150,000.00 $ Serebryany2002 25,000,000.00 $ 28,100.00 $ $ 1.00 0.83 0.98 75,000,000.00 $ Shearer/Tejas1999 7,000,000.00 $ 60,500.00 $ $ 0.99 0.58 0.93 21,000,000.00 $ Shiah2006 75,000.00 $ 28,100.00 $ $ 0.73 0.01 0.13 225,000.00 $ Sun2002 3,000,000.00 $ 50,100.00 $ $ 0.98 0.38 0.86 9,000,000.00 $ West2008 1,000,000.00 $ 11,100.00 $ $ 0.99 0.17 0.67 3,000,000.00 $ Worthing1997 100,000.00 $ 29,100.00 $ $ 0.77 0.02 0.17 300,000.00 $ Ye2002 1,750,000.00 $ 7,600.00 $ $ 1.00 0.26 0.78 5,250,000.00 $ AVG2,468,509.49 $ 47,661.71 $ 0.86 0.31 0.61 7,405,528.46 $ Figure 6: Chart of data from conspiracy and attemp ted trade secret theft cases Figure 6 shows data from EEA cases involving attemp ted trade secret theft or conspiracy to steal trade secrets where the offender was caugh t prior to committing the crime. The EEA criminalizes any attempt or conspiracy to steal trade secrets. This means that law enforcement can intervene prior to any harm being d one to potential victims. Had there been no EEA, these offenders would not have been ca ught and the victims would have possibly been left with no recourse but the insuffi cient remedies to trade secret theft described in Chapter One.
68 Figure 7: Chart of EEA attempt and conspiracy sent ences
69 Figure 7 illustrates sanctions for EEA cases where law enforcement intervened before trade secret theft occurred so the victims were not harmed in these cases. For these cases every sanction falls above the perfect disgorgement line meaning that all of these cases involved sanctions that would be sufficient to dete r trade secret theft according to Beckers theory. Even if these sanctions were sign ificantly discounted by the perceived probability of receiving a sanction in the first pl ace these cases are unique because the offenders were tried for crimes of conspiracy or at tempted trade secret theft. If a company were to privately discover that someone was planning to steal their intellectual property they would have no civil cause of action u ntil that person actually committed a tortuous act and then their remedy would be limited to repayment. This study had a sample size of n = 35. Of those 3 5 cases, 14 were conspiracy cases or thwarted attempts. That means that just u nder half of the EEA cases would not have even qualified for a civil lawsuit. More impo rtantly, law enforcement intervened before any harm was done to the potential victims. It has been stated in testimony before congress that there are hundreds more EEA cases inv estigated by law enforcement every year than are filed in court and it is not uncommon for potential victims to be warned ( HEARING OF THE SENATE JUDICIARY COMMITTEE SUBJECT: OVERSIGHT OF THE FEDERAL BUREAU OF INVESTIGATION (FBI) CHAIRED B Y: SENATOR PATRICK LEAHY (D-VT) WITNESS: ROBERT MUELLER, DIREC TOR, FEDERAL BUREAU OF INVESTIGATION LOCATION: 226 DIRKSEN SENAT E OFFICE BUILDING, WASHINGTON, D.C. TIME: 10:04 A.M. EDT DAT E: WEDNESDAY, MARCH 30, 2011 (part 10). 2011). The EEA allows law enforcement to supplemen t the
70 private security measures of US businesses thereby deterring trade secret theft. A potential trade secret thiefs knowledge of this fu nction of government would be similar to a burglar alarm sticker on a house. Government involvement in trade secret protection serves as a warning to potential thieves. If all cases where the value of the trade secret i s over $500,000 M are thrown out, the necessary probability of conviction to deter trade secret goes down to .38. This suggests that the EEA is a more effective dete rrent to trade secret theft for less valuable secrets. This is also consistent with the reports from ASIS that the growth in the number of incidences of trade secret theft before a nd after the passage of the EEA went from exponential to linear since only some trade se cret theft is being deterred. EEA violations that did not involve actual trade se cret theft were charted and graphed in Figures 8 and 9 shown below to investiga te whether actual and attempted trade secret theft were treated with more or less e ffective sanctions. Actual trade secret theft cases did not yield significantly lower thres hold probabilities so the utility function for these cases is similar to that of EEA cases in general.
71 Case NameYear Potential Benefit Sanction Sanction Plus Restitution Perfect Disgorgement p cor ind .75B/.25 Campbell1998 100,000.00 $ 20,000.00 $ 22,800.00 $ 2,800.00 $ 0.83 0.02 0.17 300,000.00 $ Camp et al1998 15,000.00 $ 25,500.00 $ 33,000.00 $ 7,500.00 $ 0.37 0.00 0.03 45,000.00 $ Davis1997 1,250,000.00 $ 60,100.00 $ 70,100.00 $ 10,000.00 $ 0.95 0.20 0.71 3,750,000.00 $ Min2006 181,000.00 $ 70,100.00 $ 84,567.00 $ 14,467.00 $ 0.72 0.03 0.27 543,000.00 $ Cotton2008 250,000.00 $ 54,100.00 $ 69,100.00 $ 15,000.00 $ 0.82 0.05 0.33 750,000.00 $ Dorn2002 15,920.00 $ 4,100.00 $ 20,020.00 $ 15,920.00 $ 0.80 0.00 0.03 47,760.00 $ Sindelar1998 16,618.00 $ 10,100.00 $ 26,718.00 $ 16,618.00 $ 0.62 0.00 0.03 49,854.00 $ Chilowitz2007 27,000.00 $ 6,325.00 $ 33,325.00 $ 27,000.00 $ 0.81 0.01 0.05 81,000.00 $ Chang2000 60,000.00 $ 90,100.00 $ 150,100.00 $ 60,000.00 $ 0.40 0.01 0.11 180,000.00 $ Alcaron2007 700,000.00 $ 81,450.00 $ 156,450.00 $ 75,000.00 $ 0.90 0.12 0.58 2,100,000.00 $ Corgnati1999 120,000.00 $ 10,100.00 $ 130,100.00 $ 120,000.00 $ 0.92 0.02 0.19 360,000.00 $ Kim2008 190,000.00 $ 46,300.00 $ 235,000.00 $ 188,700.00 $ 0.80 0.04 0.28 570,000.00 $ Pampa (Norelli et al.)2002 240,000.00 $ 16,100.00 $ 256,100.00 $ 240,000.00 $ 0.94 0.05 0.32 720,000.00 $ Trujillo-Cohen1997 337,000.00 $ 100.00 $ 337,100.00 $ 337,000.00 $ 1.00 0.06 0.40 1,011,000.00 $ Ameri2002 1,405,694.00 $ 73,900.00 $ 1,479,594.00 $ 1,405,694.00 $ 0.95 0.22 0.74 4,217,082.00 $ Keppel2002 800,000.00 $ 230,100.00 $ 2,230,100.00 $ 2,000,000.00 $ 0.78 0.14 0.62 2,400,000.00 $ Yang, Four Pillars1996 800,000.00 $ 151,500.00 $ 2,151,500.00 $ 2,000,000.00 $ 0.84 0.14 0.62 2,400,000.00 $ Hsu, Ho1997 4,000,000.00 $ 16,100.00 $ 4,016,100.00 $ 4,000,000.00 $ 1.00 0.44 0.89 12,000,000.00 $ Burnstein, Clinton2006 6,939,600.00 $ 8,100.00 $ 6,947,700.00 $ 6,939,600.00 $ 1.00 0.58 0.93 20,818,800.00 $ AVG2,468,509.49 $ 47,661.71 $ 971,024.95 $ 0.81 0.11 0.38 7,405,528.46 $ Figure 8: Chart of actual trade secret theft cases
72 Figure 9: Graph of actual trade secret theft cases
73 Because the maximum penalty for individuals violati ng the EEA is $500,000, cases of actual trade secret theft where the value of the tr ade secret to the thief was less than the maximum sanction were examined using the same metho d to determine whether there is a deterrent effect these lower value cases: Case NameYear Potential Benefit Sanction Sanction Plus Restitution Perfect Disgorgement p cor ind .75B/.25 Campbell1998 100,000.00 $ 20,000.00 $ 22,800.00 $ 2,800.00 $ 0.83 0.02 0.17 300,000.00 $ Camp et al1998 15,000.00 $ 25,500.00 $ 33,000.00 $ 7,500.00 $ 0.37 0.00 0.03 45,000.00 $ Min2006 181,000.00 $ 70,100.00 $ 84,567.00 $ 14,467.00 $ 0.72 0.03 0.27 543,000.00 $ Cotton2008 250,000.00 $ 54,100.00 $ 69,100.00 $ 15,000.00 $ 0.82 0.05 0.33 750,000.00 $ Dorn2002 15,920.00 $ 4,100.00 $ 20,020.00 $ 15,920.00 $ 0.80 0.00 0.03 47,760.00 $ Sindelar1998 16,618.00 $ 10,100.00 $ 26,718.00 $ 16,618.00 $ 0.62 0.00 0.03 49,854.00 $ Chilowitz2007 27,000.00 $ 6,325.00 $ 33,325.00 $ 27,000.00 $ 0.81 0.01 0.05 81,000.00 $ Chang2000 60,000.00 $ 90,100.00 $ 150,100.00 $ 60,000.00 $ 0.40 0.01 0.11 180,000.00 $ Corgnati1999 120,000.00 $ 10,100.00 $ 130,100.00 $ 120,000.00 $ 0.92 0.02 0.19 360,000.00 $ Kim2008 190,000.00 $ 46,300.00 $ 235,000.00 $ 188,700.00 $ 0.80 0.04 0.28 570,000.00 $ Pampa (Norelli et al.)2002 240,000.00 $ 16,100.00 $ 256,100.00 $ 240,000.00 $ 0.94 0.05 0.32 720,000.00 $ Trujillo-Cohen1997 337,000.00 $ 100.00 $ 337,100.00 $ 337,000.00 $ 1.00 0.06 0.40 1,011,000.00 $ AVG2,468,509.49 $ 47,661.71 $ 116,494.17 $ 0.75 0.02 0.18 7,405,528.46 $ Figure 10: Chart of lower value trade secret theft cases Figure 10 reveals a different picture of the deterr ent effect of the EEA. The threshold probability is 10% lower for these cases than it is for EEA cases in general. Further, a threshold probability of .02 for the maximum penalt y for corporations is indicative that corporations would likely not opt to steal low valu e trade secrets. This data indicates that the EEA is likely to deter theft of lower value tra de secrets. This is illustrated graphically by Figure 11:
74 Figure 11: Graph of sanctions from low-value trade secret theft cases
75 Figure 11 shows only three cases where the sanction falls below the perfect disgorgement line. While this is not in keeping with Beckers m odel of optimal deterrence, it does show that the EEA is more likely to deter would-be trade secret thieves from targeting smaller companies or secrets with less value. This data shows that trade secrets of lower value are offered more protection from the EEA than those of higher value. Also, the prov isions of a penalty for attempted trade secret theft and conspiracy to steal trade secrets also serves as a deterrent to economic espionage. The calculations in the first part of C hapter Three assume the probability of receipt of a penalty for violating the EEA in unkno wn. It is possible to estimate the probability of penalty using available data from AS IS. This estimation will further illuminate the deterrent effect of the EEA. Measuring the Number of Offences The clearance rate is one way criminologists and legal scholars measure the effectiveness of law enforcement. The clearance ra te is the number of arrests made from the number of crimes reported represented by: I/C
76 where I is the number of individuals imprisoned and C is the measure of the number of crimes committed (Geerken & Gove, 1977). The cle arance rate in for aggregate crime reported in the United States 1991 was 20%17 (Ehrlich, 1996). Measuring the clearance rate by counting the number of arrests can be a use ful measure of law enforcement efficiency, but also that is not enough has been sa id about what such rates actually measure. A study presented by Logan claims that for at least some offenders, arrest is a form of punishment in itself (Logan, b). His basis for this claim is that being arrested is inconvenient, typically embarrassing, and, if the d efendant is not financially well off, often means an automatic fine of 10 percent of bail (the bail bondsman's usual percentage). For more serious crimes, arrest often means imprisonment in a city or county jail until trial, no matter what the eventua l outcome of that trial. But it is probable that the inconveniences associated with arrest are often is not in themselves a serious form of punishment for many offenders. This is par ticularly true when criminal behavior has taken on a career. However, clearance rates can be interpreted in another way: as a proxy for conviction or imprisonment rates. If the data on imprisonment is seriously flawed, clearance rates may in fact be a better est imate of actual risk of incarceration (Geerken & Gove, 1977). For the EEA, however, the clearance rate is not an effective indicator the overall number of incidences of econo mic espionage due to significant 17 In later analysis of EEA data, a 25% probability o f receiving a sanction is used to analyze the EEA d ata as an arbitrary gauge of its effectiveness partly b ased on this figure.
77 underreporting of these types of crimes. This unde rreporting means traditional methods of crime analysis do not easily translate to analys is of trade secret theft and the EEA. Probability of Conviction Beckers model depends on how a criminal perceives their odds of being caught. The probability of conviction in this calculation i s whatever the thief assesses it to be. Beckers theory depends on a thief being a rational actor with access to information. Therefore, the actual probability of conviction or some reasonable estimate should be available to a trade secret thief if they do their due diligence. The clearance rate discussed earlier is defined as the number of convictions out of the number of reported arrests. This is a widely u sed figure for the probability of conviction18 but it is not appropriate for analysis of the EEA because it would falsely lead to a conclusion that every incident of trade secret theft would lead to a conviction. According to the Justice Department there is a 100% conviction rate once charges are filed (Krotoski, 2009). However, according to ASIS most incidents of trade secret theft, unlike other types of crime, go unreported ( Trends in proprietary information loss, 2007). Therefore the clearance rate is not an acceptable p redictor of the probability of conviction for this study. This is the figure used by the National Counterinte lligence Center in their Annual Report to Congress as proof of the success of the EEA when they are askin g for their funding to be renewed.(National Counterintelligence Center, 2006)
78 Careful inspection of data reported to ASIS reveals something closer to an accurate probability of conviction than a tradition al clearance rate. According to ASIS and Justice Department Statistics, approximately on e in 30,000 [sic] incidents of trade secret theft results in a conviction based on the f ollowing analysis. The 2001 ASIS survey indicates that the average loss per incident was $333,752. The estimated annual losses to US businesses that year were $56B meaning there are approximately 167,789 incidents of trade secret theft in the United State s ( Trends in proprietary information loss, 2002). According to the Justice Department there h ave been 120 convictions under the EEA since it was passed in 1996 (Krotoski, 2009). This is an average of 8 convictions per year19. So, 167,789 incidents of trade secret theft divi ded by the annual average of 8 convictions means the rate of conviction is approxi mately one in thirty-thousand. The number of convictions includes pending cases becaus e there is a near 100% conviction rate once charges are filed (Krotoski, 2009). Ideal Penalty The last column of Figure 5 and subsequent graphs o f EEA data from PACER shows what the penalty would have to be in order to accommodate p = .25, an extremely generous but more realistic estimate for p, but mor e realistic when considering perceived probability of conviction. The maximum ideal penal ty would then be $75M and the 19 Because so many of these trials take years to com plete, an average annual conviction rate is the mos t applicable statistic.
79 average penalty $7.5M. The average penalty necessa ry to deter trade secret theft if the probability of conviction is .25 is fifteen times the current sanction The maximum sanction would accommodate p = .5, an extremely unr ealistic possibility considering that currently only one in 30,000 incidents of trade sec ret theft results in a conviction. There is currently a proposal to double the sanctio ns provided by the EEA before the Senate. If that proposal is accepted, the dete rrent effect of the EEA is still limited by federal sentencing guidelines. The same sentencing guidelines are used for EEA cases as any other federal criminal charge (United States Co urts, 2011). There is a point system provided in these guidelines whereby offenders can get sentence reductions for first time offences or other extenuating circumstances. EEA c ases generally involve first time offenders (United States Courts, 2011). Therefore the average sentence for an EEA offender is reduced. These sentence reductions bas ed on standardized federal sentencing guidelines are the reason EEA sentences are so ligh t. There was no discussion of this fact during the passage of the legislation or the recent Senate hearings on proposed doubling of EEA sanctions. More research is needed to deter mine whether different sentencing guidelines for the EEA and perhaps white collar cri me in generalis necessary to eliminate reduced sentences for first time offender s in order to increase the deterrent effect of these laws. Further, people who steal tr ade secrets are generally higher paid so are able to pay higher fines. More research is nec essary to determine whether prison time would be more of a deterrent to this population tha n the fines.
80 The following pages contain calculations of the wha t-if scenario for doubling the penalties provided by the EEA. Figure 12 shows cal culations using Beckers model and the what-if scenario of doubling the EEA sanctions. There is a slight decrease in the average threshold probabilities of receiving a pena lty necessary to deter EEA violations when Figure 12 is compared to Figure 4. Still, the se sanctions are most effective against theft of lower valued trade secrets. The graph in Figure 13 further demonstrates the ineffectiveness of doubling the sanction. Even whe n the penalty is doubled, the sanction as a function of the seriousness of the offense sti ll falls below the perfect disgorgement line.
81 Case NameYear Potential Benefit Sanction Double S anction Double Sanction Plus Restitution Perfect Disgorgement p corp ind Grande2007 3,000,000.00 $ 17,600.00 $ 35,200.00 $ 35,200.00 $ $ 0.99 0.23 0.75 Hallsted, Pringle1998 75,000.00 $ 170,000.00 $ 340,000.00 $ 340,000.00 $ $ 0.18 0.01 0.07 Kern1999 3,500,000.00 $ 34,000.00 $ 68,000.00 $ 68,000.00 $ $ 0.98 0.26 0.78 Krumrei1999 350,000.00 $ 58,100.00 $ 116,200.00 $ 116,200.00 $ $ 0.75 0.03 0.26 Lange1999 8,000,000.00 $ 69,085.00 $ 138,170.00 $ 138,170.00 $ $ 0.98 0.44 0.89 Meng2004 7,000,000.00 $ 64,200.00 $ 128,400.00 $ 128,400.00 $ $ 0.98 0.41 0.88 Petrolino2001 9,000,000.00 $ 4,100.00 $ 8,200.00 $ 8,200.00 $ $ 1.00 0.47 0.90 Rashidi2005 50,000.00 $ 34,100.00 $ 68,200.00 $ 68,200.00 $ $ 0.42 0.00 0.05 Rector2000 50,000.00 $ 28,200.00 $ 56,400.00 $ 56,400.00 $ $ 0.47 0.00 0.05 Shearer/Tejas1999 7,000,000.00 $ 60,500.00 $ 121,000.00 $ 121,000.00 $ $ 0.98 0.41 0.88 Shiah2006 75,000.00 $ 28,100.00 $ 56,200.00 $ 56,200.00 $ $ 0.57 0.01 0.07 Sun2002 3,000,000.00 $ 50,100.00 $ 100,200.00 $ 100,200.00 $ $ 0.97 0.23 0.75 West2008 1,000,000.00 $ 11,100.00 $ 22,200.00 $ 22,200.00 $ $ 0.98 0.09 0.50 Worthing1997 100,000.00 $ 29,100.00 $ 58,200.00 $ 58,200.00 $ $ 0.63 0.01 0.09 Ye2002 1,750,000.00 $ 7,600.00 $ 15,200.00 $ 15,200.00 $ $ 0.99 0.15 0.64 Campbell1998 100,000.00 $ 20,000.00 $ 40,000.00 $ 42,800.00 $ 2,800.00 $ 0.71 0.01 0.09 Camp et al1998 15,000.00 $ 25,500.00 $ 51,000.00 $ 58,500.00 $ 7,500.00 $ 0.23 0.00 0.01 Davis1997 1,250,000.00 $ 60,100.00 $ 120,200.00 $ 130,200.00 $ 10,000.00 $ 0.91 0.11 0.56 Min2006 181,000.00 $ 70,100.00 $ 140,200.00 $ 154,667.00 $ 14,467.00 $ 0.56 0.02 0.15 Cotton2008 250,000.00 $ 54,100.00 $ 108,200.00 $ 123,200.00 $ 15,000.00 $ 0.70 0.02 0.20 Dorn2002 15,920.00 $ 4,100.00 $ 8,200.00 $ 24,120.00 $ 15,920.00 $ 0.66 0.00 0.02 Sindelar1998 16,618.00 $ 10,100.00 $ 20,200.00 $ 36,818.00 $ 16,618.00 $ 0.45 0.00 0.02 Chilowitz2007 27,000.00 $ 6,325.00 $ 12,650.00 $ 39,650.00 $ 27,000.00 $ 0.68 0.00 0.03 Chang2000 60,000.00 $ 90,100.00 $ 180,200.00 $ 240,200.00 $ 60,000.00 $ 0.25 0.01 0.06 Alcaron2007 700,000.00 $ 81,450.00 $ 162,900.00 $ 237,900.00 $ 75,000.00 $ 0.81 0.07 0.41 Corgnati1999 120,000.00 $ 10,100.00 $ 20,200.00 $ 140,200.00 $ 120,000.00 $ 0.86 0.01 0.11 Kim2008 190,000.00 $ 46,300.00 $ 92,600.00 $ 281,300.00 $ 188,700.00 $ 0.67 0.02 0.16 Pampa (Norelli et al.)2002 240,000.00 $ 16,100.00 $ 32,200.00 $ 272,200.00 $ 240,000.00 $ 0.88 0.02 0.19 Trujillo-Cohen1997 337,000.00 $ 100.00 $ 200.00 $ 337,200.00 $ 337,000.00 $ 1.00 0.03 0.25 Ameri2002 1,405,694.00 $ 73,900.00 $ 147,800.00 $ 1,553,494.00 $ 1,405,694.00 $ 0.90 0.12 0.58 Keppel2002 800,000.00 $ 230,100.00 $ 460,200.00 $ 2,460,200.00 $ 2,000,000.00 $ 0.63 0.07 0.44 Yang, Four Pillars1996 800,000.00 $ 151,500.00 $ 303,000.00 $ 2,303,000.00 $ 2,000,000.00 $ 0.73 0.07 0.44 Hsu, Ho1997 4,000,000.00 $ 16,100.00 $ 32,200.00 $ 4,032,200.00 $ 4,000,000.00 $ 0.99 0.29 0.80 Burnstein, Clinton2006 6,939,600.00 $ 8,100.00 $ 16,200.00 $ 6,955,800.00 $ 6,939,600.00 $ 1.00 0.41 0.87 AVG2,468,509.49 $ 47,661.71 $ 3,280,120.00 $ 610,453.50 $ 0.75 0.12 0.38 Figure 12: Chart of double EEA penalties
82 Figure 13: Effect of double punishment
83 The Hsu Case Another factor in the probability of conviction is the probability the case will be reported by the victim. US v. Hsu is a landmark case in that it sets a precedent for this issue. The Hsu case illustrates this challenge invo lved in increasing the probability of conviction. Companies have many reasons for being tight lipped when they are a victim of trade secret theft. Their vulnerability in this area can seriously damage their reputation, leading to even further losses. Also, unlike a civil case, a criminal investigation and trial is under the control of the government, not the victim. Therefore, companies fear their proprietary information may be further compromised during the trial. The constitution provides a right to a fair trial, including the right of the defendant to discovery of all evidence against him. The Hsu case20 highlights the issue of whether or not a defendant has the right to the details of the trade secret during discovery. On one hand it may be necessary to prove a trade secret ex ists if someone is to be found guilty of 20 In July of 1997, Kai-Lo Hsu, Chester Ho, and Jessi ca Chou, agents of the Yuen Foong Paper Company in Taiwan, were indicted on 11 counts as the result of an FBI sting operation. Two of these were EEA charges for tryin g to buy proprietary information pertaining to the manufacture of Taxol, an anti-can cer drug made by Bristol-Meyers Squibb. (Nasheri, 2005) Bristol-Myers Squibb wou ld have lost approximately up to $2 billion in revenue over ten years had the Taiwanese would be thieves been successful. Hsu pled to one count of conspiring to steal trade secrets and was sentenced to two years probation and a $10,000 fine. (Carr et al., 2000) A ll charges that would have carried hefty prison terms were dropped. When Hsu pled guilty, c harged against Ho were dropped as well.
84 stealing it. On the other hand, by revealing the s ecret to the defense at trial, the very damage the EEA was created to protect is necessary to the discovery process (Carr, Jack Morton, & Jerry Furniss, 2000). One of the factors in the probability of conviction if the probability the theft will be reported and companie s are not inclined to report trade secret theft if they do not trust the governments discres sion in trying the case. During the trial, prosecutors filed a motion for a protective order to prevent the defense from reviewing certain documents containing Bristol-Myers Squibbs trade secret. Their motion was denied ( United States v. Hsu, ). The US Department of Justice appealed a trial judge's ruling regarding protectiv e orders for trade secrets a provision of the EEA (Title 18 U.S.C., § 1835). The defendant w anted the trade secret to be introduced as evidence and a trial judge agreed say ing the right to a fair trial trumps the rights of a company to protect its trade secrets. The government later won the appeal. At that time the judge agreed with them that Congre ss drafted the EEA with the intent of developing a systematic approach to the problem of economic espionage. and stresses that only by adopting a national scheme to protect US propriety information can we hope to maintain our economic edge and thus safegua rd out national security (Carr et al., 2000; United States v. Hsu). The court was clear i n their interpretation of the intent behind the law. However, their ruling also stated that the appeal was granted because Hsu was only charged with attempting to steal a tra de secret. Accordingly, there is no need to prove there was in fact a trade secret to p rove Hsu tried to steal one. This leaves the door open for a similar decision to be upheld i n the future in a case of alleged theft as opposed to attempted theft.
85 In light of the Hsu case, victims of trade secret t heft are understandably concerned about this issue even though there is a provision i n the EEA that is intended to prevent disclosure of trade secrets. This case also brings to light the fact that it is the US government that has control over the charges filed and pursued and that, unlike a civil case, there is little a victim can do to protect th eir information after reporting the crime. Even though the court held that the defendant does not necessarily have a right to the trade secret as part of the discovery, there was no t a clear ruling that victims have a right to keep their information private through the cours e of a trial. This can deter victims from reporting trade secret theft is a significant influence on the probability of punishment for economic espionage. Indications of Companies Likelihood to Report Infor mation Theft ASIS data further highlights companies hesitancy t o report EEA violations. The 2007 ASIS survey asked respondents to describe the single most significant successful attempt to compromise or gain unauthorized access t o proprietary information during 2005. The response rates to this line of questioni ng in the ASIS survey dropped significantly which is indicative of hesitancy amon g victims to report trade secret theft. ( Trends in proprietary information loss, 2007) The larger companies responding to the ASIS surveys are not reporting losses at the same r ate as the smaller companies. This may be because they are better able to protect them selves than their smaller counterparts but it may also be because they are experiencing lo sses and not telling anyone about it for
86 fear they may damage their reputation somehow throu gh an anonymous survey. (Heffernan & Swartwood, 1996) About half of the EEA cases in the PACER system wer e sealed and information about the victim, the intellectual property or even much about the accused in the news or any other sources regarding those cases was unavail able. This is an indication that the government makes some effort to protect trade secre ts when trying an EEA case. However there is still a significant risk that even if the actual secret is not disclosed, the public announcement that a company was the victim o f the theft could potentially damage their reputation and contribute to further l osses. It is possible that making all EEA cases sealed by default would encourage compani es to come forward but by not publicizing prosecutions, the deterrent effect of t he law is minimized by reducing the perceived probability of apprehension. Globalization The Hsu case illustrates another difficulty with th e EEA21. Many foreign countries are reluctant to extradite their citizens to stand trial for a crime that is not illegal in their country. Industrial espionage is a common practice throughout Asia, as it was when the EEA was passed. Not only is it not illega l there, it is expected and accepted as 21 Chou remains in Taiwan. Taiwan had stated that it would not help the FBI bring Chou to justice in the United States (Fink, 2002).
87 business as usual (Nasheri, 2005). Increasing comm ercial ties to this part of the world was one of the reasons cited for supporting compani es trying to protect themselves from this practice by passing the EEA. While outcomes o f court cases may not deter foreign nationals, US intelligence and law enforcement reso urces are available to thwart their efforts. September 11, 2001 When the EEA was passed, lawmakers were concerned a bout unemployed coldwar era spies working on behalf of foreign companie s stealing corporate trade secrets. It was thought that because there was not as much d emand for political and military spies after the cold war, there were more of them stealin g recipes and client lists instead of military secrets. Part of the rationale for devoti ng federal government resources to protecting corporate interests was that legislators believed that in order to be economically competitive, the US needed to protect its economic interests from espionage on behalf of foreign governments. If the global military and political climate does in fact influence, the rate of trade secret th eft, this phenomenon is not detectable in the ASIS and PACER data. The data collected from the PACER System indicated that from 2002 to 2005 the average number of cases per year is half that of th e number of yearly cases before and after the EEA was passed. This suggests that a pos sible diversion of intelligence and law enforcement resources toward counterterrorism in th e post 9/11 era rather focusing their
88 efforts on economic concerns. The ASIS survey publ ished in 2007 covered the calendar year of 2005. That year showed the first increase in trade secret theft in terms of incidents or dollar losses since the passage of the EEA. This is also suggestive that active enforcement of the EEA is a deterrent to trade secr et theft, not in the sense that potential thieves are scared off by visible arrests and well publicized penalties but perhaps by intervention by law enforcement that never produces a court case or improvement in private awareness and security. The EEA and the Business Intelligence Industry The Economic Espionage Act was passed in the face of increasing trade secret theft worldwide. Congress acknowledges that inform ation may well be the most vital component of the U.S. economy. The EEA defines no t only what is illegal intelligence gathering but serves as a unifying guideline for le gal intelligence gathering, a multibillion dollar industry, by defining for the entire U.S. what economic espionage is not. (Robinson, 2009; Society of Competitive Intelligenc e Professionals, 1999; Strategic and Competitive Intelligence Professionals, 2011) The Strategic and Competitive Intelligence Professionals (SCIP) is a professional organization for business intelligence welcomed the Act because it helped lend credibility to their profession. By adopting ethics guidelines in keeping with the new law, memb ers could claim that they werent spies. (Penenberg & Barry, 2000) The code of ethi cs for the SCIP as detailed on their website is as follows:
89 To continually strive to increase the recognition a nd respect of the profession. To comply with all applicable laws, domestic and international. To accurately disclose all relevant information, in cluding one's identity and organization, prior to all inter views. To avoid conflicts of interest in fulfilling one's duties. To provide honest and realistic recommendations and conclusions in the execution of one's duties. To promote this code of ethics within one's company with third-party contractors and within the entire profe ssion. To faithfully adhere to and abide by one's company policies, objectives and guidelines. (Strategic a nd Competitive Intelligence Professionals, 2011) According to Adam Penenberg, author of Spooked a compilation of memoirs related to industrial spying, this code of ethics i s only for show and is approached by most business intelligence professionals with a wi nk wink nudge nudge attitude. In his book, he exposes what he claims to be more the norm in the field. If his assessment is true, then it would appear that big business approa ches the EEA like any other potential liability and breaks the law regularly when it is e conomically beneficial to do so.22 (Cooter, 2004; Penenberg & Barry, 2000) These stori es from industrial spies directly involved in the information market explain the shif t in business intelligence since the passage of the EEA and how that law has served to p rotect trade secrets of small and 22 For a complete discussion of how businesses make d ecisions regarding regulations, safety, prevention of accidents, and other potential liabilities, see Coo ters textbook, Law and Economics.
90 mid-sized businesses and define the ethics of the f ield of legitimate business intelligence gathering. Another perspective on the EEA and the business int elligence industry is offered by Richard Horowitz. In his article titled The E conomic Espionage Act: The Rules Have Not Changed, he claims that the EEA changes the penalties and the chances of getting caught but the rules are the same. His art icle was in response to an uproar in the competitive intelligence community upon the passage of the act where many expressed fears that the industry would change. Horowitz cla ims that the SCIP ethics guidelines fall well within the limits of the EEA and no busin ess intelligence professional doing their job correctly would be affected by the new le gislation. He further points out that there are no examples of business intelligence prof essionals being sued or prosecuted by the already existing state and federal civil and cr iminal laws prior to the passage of the EEA. He points to this fact as evidence that the E EA is not aimed at the legitimate business intelligence industry at all but is rather meant to protect against foreign governments acting against US companies by stealing their trade secrets. When the law was written, it was an afterthought to include dome stic trade secret theft in its scope. (Horowitz, 1998) Years later, there have been only a few EEA cases involving foreign governments. (United States Courts, 2011) The anal ysis above shows that the EEA is a game changer, perhaps not by changing the business intelligence industry but by changing the penalty for misappropriation of trade secrets with potential large fines and increasing the probability of apprehension by allow ing for U.S. federal law enforcement resources to be used to investigate and prosecute t hese offenses.
91 In his book, Spooked Penenberg gives a few examples of how business intelligence professionals collect information, wha t they are paid to do it and how this intelligence is used by the companies after they ha ve acquired it. These examples can also be considered within the framework of Beckers theory. One thing that stands out about the examples is that it is difficult to put a dollar amount on the value of information, particularly when time is a factor in a firms acquisition of a competitors proprietary information. Each EEA case found in th e PACER database had a dollar amount assigned by the court to reflect the value o f the piece of information stolen. In these cases there was often disagreement about the value of the information between the two parties in the cases. The information was ofte n worth something different to original owner of the information, the thief and the buyer d epending on what related information they already had, when they acquired the informatio n, and how it could be used. Sometimes a thief was paid a flat fee for stealing a specific piece of information. In that case, the amount the defendant was paid was conside red to be the value of the information even though the victim stood to lose pe rhaps even a hundred times that over a period of time if the defendant had been successf ul. These potential losses would have been due to a damaged reputation, loss of market sh are or even complete bankruptcy. Here three examples from Penenbergs book in which the EEA was violated are summarized and using Beckers theory, show what the ideal penalty would have had to be in order to deter the trade secret theft. Addit ionally, these examples show how loopholes in the Act allow companies to commit econ omic espionage without fear of facing a penalty at all.
92 All but one case prosecuted under the EEA23 involved a professional spies or people who were involved in the business intelligen ce field. The first case prosecuted under the EEA involved a professional mole, Victor Lee. He had no experience in the intelligence field but was rather hired by his prim ary employers competitor to steal trade secrets through the course of his regular employmen t. He was apparently unaware that he was breaking the law until he was approached to be a part of an FBI sting to arrest the Yangs of Four Pillars paper company based in Taiwan In 1995 Victor Lee, a Taiwanese national, worked fo r Avery Dennison, a US based paper company. He had access to information about adhesive formulas that were of interest to the Avery Dennisons competitor, Fou r Pillars of Taiwan. Four Pillars paid Lee to obtain documents from Avery Dennison that co ntained information about the formulas Avery Dennison was using for their adhesiv e name tags. In return Lee was flown home to Taiwan once a year to visit his famil y. During those visits he also met with the Yangs to discuss how he could be of furthe r help to them in their competition with Avery Denison. He was also paid additional ca sh sums for his efforts. This was the first case tried under the EEA and ha s gotten it a lot of attention from news and journal articles, as well as legal sc holars. There were issues with this case due to a judge granting bail to the Yangs who then fled to Taiwan and never paid their fines among other supposed legal missteps with this case. Only Penenberg points out the 23 Many of the EEA cases were sealed by judges order so it is possible those cases involved business intelligence professionals, however it is unlikely that would have happened without attracting media attention prior to court records being sealed.
93 possibility of misuse of the EEA by Avery Dennison to take out their smaller foreign competitor, Four Pillars. According to Penenberg, the Yangs claimed Avery Dennison was using adhesive formulas that Four Pillars had d eveloped first. His account of what the Yangs attorney relayed that Avery Dennison stra tegically timed the use of Lee to set up an FBI sting at just the time to allow them to r elease their products to Asian markets and take the majority Four Pillars market share. A ccording to Penenberg, the secrets the Yangs were convicted of stealing were Avery Denniso ns documents containing formulas that Four Pillars had developed first. The Yangs a sserted they were trying to verify that Avery Dennison was using their formulas and when th ey were planning to sell them to Asian markets. This is the only example in any lit erature of the EEA being used to incapacitate a competitor (Penenberg & Barry, 2000) Another example of how business intelligence profes sionals regularly violate the EEA through the course of their work is through the employment of a kite. In the business intelligence field, a kite is an independe nt contractor that acquires information about a competitor for a client using whatever mean s necessary. Mark Barry is an extremely vocal corporate spy and made millions of dollars working as a kite but was never caught. He is not a member of the SCIP becau se he claims it is a hypocritical organization. In an interview with Russell Mokhibe r he explained that "A kite is somebody who is essentially expendable, somebody wh o is flown out there, and if it hits the fan, the controller can cut the string, deny kn owledge and let the kite fly off on its own." In addition to the information, the kite prov ides the client whats known as plausible deniability. The contract signed betwe en the client and the intelligence
94 professional will usually stipulate very clearly th e ethical boundaries that are expected in the relationship; however the client and the kite b oth know that the information will be come by in a clandestine manner. In exchange for t his plausible deniability, the kite is paid a handsome fee. Because of non-disclosure agr eements, these arrangements are always kept secret. According to Barry in an inter view with Alita Edgar, members of SCIP routinely break the law through the course of gathering information for their employers. (Edgar, 2002) As he stated to Penenberg Corporate espionage is a real growth business . Its the corporate equivalent of a threesome. Lots of people are doing it but no ones admitting to it. His chief complaint of the SCIP is that they are hypocrites. He claims that many of them use the sa me tactics he admits to, only they pretend not to. (Penenberg & Barry, 2000) An example of how the relationship between a large corporation and a kite works as detailed in Penenbergs book is as follows. In 1995 packaged foods giant Schwans hired Sarasota, FL based firm DeGenaro and Associat es, Inc. to provide information about their rival Krafts plans to produce and mark et DiGiorno rising crust pizza (Penenberg & Barry, 2000). DeGenaro and Associates describe themselves as strict adherents to SCIP guidelines. William DeGenaro is a former employee of the Department of Defense and is highly visible in the business intelligence industry. He and his company do not do anything illegal in order to provide information to their clients. (DeGenaro and Associates, 2011) DeGenaro, in order to provide Schwans with specific information about the size and scope of Krafts piz za operation, hired Mark Barry as an independent contractor. In this relationship, Barr y is what is known as a kite.
95 DeGenaro and Schwans had plausible deniability o f anything Barry did in order to acquire the information for Schwans. Barry obtained some fraudulent phone numbers and po sed as a newspaper reporter, an environmental activist, a cardboard ma nufacturer, and a few other roles. He called government offices and various departments b oth within Krafts organization and their associates to obtain specific information abo ut Krafts factory and the number of pizzas they would be producing and when. This enti re operation took him about two days and Schwans was able to recover about $70M wo rth of the rising crust pizza market as a result (Penenberg & Barry, 2000). The literature and education for business intellige nce professionals is clear that this method of intelligence gathering is illegal an d unethical. There is no official indication that this is an acceptable method of dat a collection. In fact, one recent industry article clearly states guidelines for avoiding lega l repercussions for using a kite or what they more gently refer to as an intermediary sour ce. Douglas Curtis in his article for the April 2011 issue of Competitive Intelligence Ma gazine explains the how to avoid the perils of using a kite: You can outsource much of your competitive intelligence work, but that does not necessarily me an you can avoid responsibility for a consultants deeds o r misdeeds. Your company should develop a code of con duct or code of ethics, and make sure that any consultan t doing work for your company has a copy of it and expressl y agrees to abide by it. Monitor the work and results of your consultants to ensure that you are comfortable with the methods they are using. If you fail to do so, aside from the
96 potential criminal or civil liability, your company could suffer serious political repercussions and loss of its good name.(Curtis & Carter, 2011) In his 1998 article Richard Horowitz takes another viewpoint. He argues that using proxies or the intelligence professionals com mon practice of misrepresenting their identity falls short of the definition of economic espionage because regardless of who they are, the company released the information, mea ning the information was not a trade secret. He goes further to say that he believes hi s evidence for this is that there are no trade secrets cases that also involve fraud as defi ned in § 529 of the Restatement of Torts. (Horowitz, 1998) He holds that if trade secret cas es could be made based just on an intelligence professional fraudulently obtaining in formation, there would be an overlap in these laws being used to prosecute trade secret cas es. Contrary to Horowitzs belief, in 2006 there was w hat was considered to be a major spy scandal involving Hewlett Packard (HP)( Robertson, 2009). In this rare case a private investigator24 was caught employing techniques common in the corp orate spying industry to spy on HP execs and steal their business secrets. It is not an EEA case, but the arrests and inquiry into the professional w orld of corporate spying was the only example found where such a person was actually caug ht. Large corporations do not count on the EEA to prote ct their private information. Counterintelligence measures have been employed by major corporations as a way to 24 For more information on the Hewlett Packard spy ca se, see Robertson.
97 protect themselves from economic espionage without the help of federal government resources. Former government intelligence experts are regularly employed by large corporations to manage their trade secret protectio n. Robert Galvin was the CEO of Motorola in 1985. Prior to that he served on the p residents Foreign Intelligence Advisory Board in the 1970s where he learned that foreign corporations and governments routinely spy on American corporations. Galvins involvement in government gave him a unique perspective on busines s strategy. He believed planning should be based on specific information and hired J an Herring, a former CIA analyst to build the first in-house corporate intelligence uni t in history. Galvin was aware Motorola was losing technology to not only the Chinese and Soviet Bloc but also to the Japanese, the French, a nd the Israelis. These information losses were driving them out of the radio, TV and s emi-conductor sectors. At the time, the concept of business intelligence was new to Ame rican businesses and it was a hard sell to the upper level management. In the late 19 70s Motorola predicted that CB radios, an already waning fad, would become so popular in t he US that they would be installed. They got stuck with a glut of supply when the much anticipated orders from automobile manufacturers in Detroit never came in. It was thi s event that helped Galvin convince his upper level management in various departments of Mo torola to make use of his new Corporate Intelligence (CI) Division. He needed th eir support, interest and participation if the project was to be successful and the misstep with the CB radios was just the example he needed to convince them that they needed concrete information to make smart business decisions.
98 The late 1970s were also a time when there was a h uge rift within the CIA. Many like Jan Herring were advocates of following s uit with the rest of the industrialized world and sharing intelligence with American busine sses while others strictly supported a policy of focusing resources only on national secur ity (Penenberg & Barry, 2000). The legal history of the EEA earlier in this thesis dem onstrated how it was decades later before it was openly accepted that economic interes ts were a part of national security. Herring came to Motorola and taught employees there intelligence collection techniques. Under his guidance Motorola procured i nformation about their competitors in Japan including personality information about co mpany leadership and the social climate where factories were located. He hired his own staff but many of the resources Herring had at his disposal were already on salary at Motorola and only needed a few hours of training to know what kind of information was valuable to the company in order to carry out their data collection assignments on t op of their regular workload. These assignments most importantly included frequenting b ars and nightclubs popular with the employees of the competition or tapping their exist ing personal networks for specific kinds of information. Also included in training we re techniques for preventing proprietary information loss. Fortunately for Jan Herring and Motorola, there wer e no laws against this kind of intelligence gathering in the areas where they work ed. Motorola had strict guidelines for their CI division that included following all appli cable regional laws. Herring had a million dollar a year budget and Motorola earned a hundred times that as a result of his
99 work. Had some of this intelligence gathering take n place inside the US, there may have been legal implications however; in Japan, for exam ple, industrial spying is common and accepted behavior (Penenberg & Barry, 2000). In his book, Spooked Adam Penenberg uses Karem Fadel as an example of a marketing professional who regularly resorts to esp ionage just to keep his job. Fadel confessed to Penenberg that throughout his employme nt during the early 1990s at PictureTel, a then $300M videoconferencing company, he regularly attended trade shows impersonating a random consultant in order to obtai n pricing and product specifications from his companys competitors. Despite his effort s PictureTel went out of business and Fadel moved on to work elsewhere. In this case, th e benefit from regularly committing what would come to be considered economic espionage after the passage of the EEA just a few years later was the retention of a job. Fade ls employers were unaware of the specifics of how he obtained the information and th ey never asked. According to Penenberg, trade shows are full of corporate spies and this type of illegal intelligence gathering is common (Penenberg & Barry, 2000). Usi ng a fake name at a trade show to obtain pricing or product specifications is not in itself economic espionage, however developing a cover identity and cultivating relatio nships and taking side jobs based on that false identity in which promises of confidenti ality are made is. There is no evidence that the EEA has been used to prosecute anyone who has created a false identity to make a business deal with a competitor. There are just as many sealed cases as there are cases where information is available so it is possible th at people have been prosecuted for this type of industrial spying without public knowledge (United States Courts, 2011). The
100 appearance of lack of public prosecution of profess ional corporate spies can be considered a strong incentive for more economic esp ionage. This strongly supports Mark Barrys claim that this type of economic espionage happens commonly and but is rarely publicly acknowledged by the people doing it (Edgar 2002; Mokhiber & Weissman, 2001; Penenberg & Barry, 2000). Business Intelligence and Becker Each of these examples from individual accounts of corporate spies gives narrative to go with the numbers the analysis of ca ses with Beckers theory. Corporations are using private substitutes for shor tfalls in public law enforcement. According to these accounts, every day businesses d ecide that the millions of dollars they stand to gain by breaking the law outweighs the one in 30,000 chance they will be sanctioned for their behavior. Based on figures pr ovided by Penenberg and Barry for just a few actual cases of economic espionage they have documented, it is clear that the EEA is not effective at all against this big business o f corporate espionage. Beckers model is also applicable to this data from memoir sources: Case NameBenefitCostMax Sanction pmax.75B/.25 Schwan's Pizza 199570,000,000.00 $ ?????500,000.00 $ 0.99 210,000,000.00 $ Motorola1983100,000,000.00 $ 1,000,000.00 $ 500,000.00 $ 0.99 0.99 300,000,000.00 $ Karem Fadel 80,000.00 $ $ 500,000.00 $ 1.00 0.07 240,000.00 $ Rhea2,000.00 $ $ 500,000.00 $ 0.37 0.00 6,000.00 $ AVG2,468,509.49 $ 47,661.71 $ 500,000.00 $ 0.84 0.51 7,405,528.46 $ Figure 14: Data from corporate spies
101 For large corporations, the market share to be gai ned from spying on a competitor is enormous. Figure 14 shows that according to Bec kers theory, these larger corporations like Motorola and Schwans would have to be facing absolute certainty of prosecution in order to be deterred from engaging i n corporate espionage. The maximum penalty provided by the EEA pales in comparison to the profit gained from one day of Barry on the job for Schwans pizza. This can al so be represented in Figure 15 where the profits are increased beyond the maximum penalt y allowed by the EEA. Because corporations have plausible deniability and hire in dividuals to do this work, the maximum penalty is only $500,000, the EEA penalty f or individuals instead of the $5M for corporations.
102 Figure 15: The EEA according to professional spies
103 r Based on the data collected, this study concludes E EA has directly or indirectly made a negative impact the rate of increase of trad e secret theft in the US. Because information is steadily becoming more important in the US economy and a larger portion of business assets are made up of intellectual prop erty every year, the problem of misappropriation of trade secrets has steadily incr eased as well. Still, there is evidence in aggregate data from ASIS that the rate of increase of trade secret theft is slowing down. Also, based on data collected from EEA cases, it is clear that the EEA deters theft of trade secrets valued lower than the maximum sanctio n provided by the EEA. This effectively shifts the responsibility for protectin g trade secrets of greater value to their more wealthy owners that have private resources to protect them. By protecting smaller and medium sized businesses from trade secret theft the EEA encourages small businesses to innovate while leaving larger compani es to fend for themselves. Two things stand out where there is room for improv ement. Increasing the probability of conviction and changing the sentenci ng guidelines improve the deterrent effect of the EEA. One thing that would increase t he probability of conviction is more
104 specific language in the legislation protecting tra de secrets during trial. Another would be the requirement of mandatory jail time, not just fines. This study indicates that while that may be a step in the right direction, the prob lem with the EEA is not in the potential penalties but in the relatively small sentences imp osed. More research is needed to determine whether sentencing guidelines for federal crimes are not appropriate for white collar offenders and there could be an adjustment f or this in the EEA legislation to address the gap between the penalties allowed by th e law and the sentences imposed by judges. In March of 2011, there was a hearing before the Se nate Judiciary Committee to discuss increasing the penalties in the EEA to doub le their current level ( HEARING OF THE SENATE JUDICIARY COMMITTEE SUBJECT: OVERSIGHT O F THE FEDERAL BUREAU OF INVESTIGATION (FBI) CHAIRED BY: SENATOR P ATRICK LEAHY (DVT) WITNESS: ROBERT MUELLER, DIRECTOR, FEDERAL BURE AU OF INVESTIGATION LOCATION: 226 DIRKSEN SENATE OFFICE B UILDING, WASHINGTON, D.C. TIME: 10:04 A.M. EDT DATE: WEDNESD AY, MARCH 30, 2011 (part 10). 2011). This study demonstrated that even with sent ences doubled, there a rational criminal would have still chosen to commit the crimes documented in PACER. Unless provisions are made for judges to increase s entences beyond current sentencing guidelines, Beckers model shows that there will co ntinue to be a problem with lack of deterrence to trade secret theft.
105 Further, PACER data and individual accounts of prof essional industrial spies provide an alternative theory of the purpose of the EEAthat it is not and was never meant to be a deterrent to trade secret theft by wa y of the courts. Rather it serves to provide funding, authority and jurisdiction for US intelligence and law enforcement resources to serve as security for big business.
106 )The Economic Espionage Act of 1996 Section 1: Short Title "This Act may be cited as the "Economic Espionage A ct of 1996." -------------------------------------------------------------------------Title I : Protection of Trade Secrets Sec. 101. Protection of Trade Secrets (a) In General.-Title 18, United States Code, is amend ed by inserting after chapter 89 the following: Sec. 1831. Economic espionage. 1832. Theft of trade secrets. 1833. Exceptions to prohibitions. 1834. Criminal forfeiture. 1835. Orders to preserve confidentiality. 1836. Civil proceedings to enjoin violations. 1837. Conduct outside the United States. 1838. Construction with other laws. 1839. Definitions. Chapter 90Protection of Trade Secrets *+,rn(a) In General Whoever, intending or knowing that the offense will benefit any foreign government, foreign instru mentality, or foreign agent, knowingly (1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or decept ion obtains a trade secret;
107 (2) without authorization copies, duplicates, sketc hes, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, comm unicates, or conveys a trade secret, (3) receives, buys, or possesses a trade secret, kn owing the same to have been stolen or appropriated, obtained, or conv erted without authorization, (4) attempts to commit any offense described in any of paragraphs (1) through (3), or (5) conspires with one or more other persons to com mit any offense described in any of paragraphs (1) through (3), and one or more of such persons do any act to effect the objec t of the conspiracy, shall, except as provided in subsection (b), be fined not more than $500,000 or imprisoned not more than 15 y ears, or both. (b) Organizations Any organization that commits a ny offense described in subsection (a) shall be fined not more than $ 10, 000, 000. nr-(a) Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or pl aced in interstate or foreign commerce, to the economic benefit of any one other than the owner thereof, and intending or knowing that th e offense will injure any owner of that trade secret, knowingly (1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or decept ion obtains such information; (2) without authorization copies, duplicates, sketc hes,. draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, comm unicates, or conveys such information; (3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;
108 (4) attempts to commit any offense described in par agraphs (1) through (3); or (5) conspires with one or more other persons to com mit any offense described in paragraphs (1) through (3), an d one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined unde r this title or imprisoned not more than 10 years, or both. (b) Any organization that commits any offense descr ibed in subsection (a) shall be fined not more than $5,000, 000. *+,,)rr-This chapter does not prohibit (1) any otherwise lawful activity conducted by a go vernmental entity of the United States, a State, or a politica l subdivision of a State; or (2) the reporting of a suspected violation of law t o any governmental entity of the United States, a State, or a political subdivision of a State, if such entity has lawful a uthority with respect to that violation. *+,.--(a) The court, in imposing sentence on a person for a violation of this chapter, shall order, in addition to any other sentence imposed, that the person forfeit to the United States (1) any property constituting or derived from, any proceeds the person obtained, directly or indirectly, as the res ult of such violation; and (2) any of the person's or organization's property used, or intended to be used, in any manner or part, to commit or fac ilitate the commission of such violation, if the court in its d iscretion so determines, taking into consideration the nature, s cope, and proportionality of the use of the property in the o ffense. (b) Property subject to forfeiture under this secti on, any seizure and disposition thereof, and any administrative or judicial
109 proceeding in relation thereto, shall be governed b y section 413 of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (21 U.S. C. 8 5 3), except for subsections (d) and 0) of such section, which shall not apply to forfeitures under this section. *+,/-0rrIn any prosecution or other proceeding under this c hapter, the court shall enter such orders and take such other action as may be necessary and appropriate to preserve the confident iality of trade secrets, consistent with the requirements of the Fe deral Rules of Criminal and Civil Procedure, the Federal Rules of Evidence, and all other applicable laws. An interlocutory appeal by the United States shall lie from a decision or order of a dist rict court authorizing or directing the disclosure of any trad e secret. *+,1-nr2r (a) The Attorney General may, in a civil action, ob tain appropriate injunctive relief against any violation of this sec tion. (b) The district courts of the United States shall have exclusive original jurisdiction of civil actions under this s ubsection. *+,3-r4*rThis chapter also applies to conduct occurring outs ide the United States if (1) the offender is a natural person who is a citiz en or permanent resident alien of the United States, or an organiza tion organized under the laws of the United States or a State or p olitical subdivision thereof-, or (2) an act in furtherance of the offense was commit ted in the Untied States. *+,+-rrThis chapter shall not be construed to preempt or d isplace any other remedies, whether civil or criminal, provided by Untied States Federal, State, commonwealth, possession, or territory law
110 for the misappropriation of a trade secret, or to a ffect the otherwise lawful disclosure of information by any Government employees under section 552 of title 5 (commonly known as the Freedom of Information Act). *+,5-"rAs used in this chapter, (1) the term 'foreign instrumentality' means any ag ency, bureau, ministry, component, institution, association, or a ny legal, commercial, or business organization, corporation, firm, or entity that is substantially owned, controlled, sponsored, commanded, managed, or dominated by a foreign government: (2) the term 'foreign agent' means any officer, emp loyee, proxy, servant, delegate, or representative of a foreign g overnment: (3) the term 'trade secret' means all forms and typ es of financial, business, scientific, technical, economic, or engin eering information, including patterns, plans, compilation s, program devices, formulas, designs, prototypes, methods, te chniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photograph ically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic va lue, actual or potential, from not being general known to, and not being readily ascertainable through proper means by the public, a nd (4) the term 'owner', with respect to a trade secre t, means the person or entity in whom or in which rightful legal or equitable title to or license in, the trade secret is reposed ." (b) Clerical Amendment. The table of chapters at the b eginning part I of title 18, United States Code, is amended by inserting after the item relating to chapter 89 the following: "90. Protection of trade secrets 1831"
111 (c) Reports. Not later than 2 years and 4 years afte r the date of the enactment of this Congress of this Act, the Attorne y General shall report to Congress on the amounts received and dist ributed from fines for offenses under this chapter deposited in the Crime Victims Fund established by section 1402 of the Vic tims of Crime Act of 1984 (42 U.S. C. 10601). Sec. 102 Wire and Electronic Communications Interce ption and Interception of Oral Communications. Section 2516(l)(c) of title 18, United States Code, is amended by inserting "chapter 90 (relating to protection of tr ade secrets)," after "chapter 37 (relating to espionage),".
112 )$Table of Figures Figure 1: From Cooter; Severity of the punishment as a function of the seriousness of the offense........................................ ................................................... ..............................36Figure 2: Also from Cooter. This graph differs fr om Figure 1 in that the expected punishment is less than the benefit for x1 through x2................................................... .....37Figure 3: Data from ASIS International surveys rel ated to their respective years. *Losses are in billions of US dollars.............. ................................................... ...............53Figure 4: The PACER data and calculations......... ................................................... .......61Figure 5: Graph of actual punishments for all EEA cases.............................................. .65Figure 6: Chart of data from conspiracy and attemp ted trade secret theft cases.............67Figure 7: Chart of EEA attempt and conspiracy sent ences.............................................. 68Figure 8: Chart of actual trade secret theft cases ................................................... ..........71Figure 9: Graph of actual trade secret theft cases. ................................................... .........72Figure 10: Chart of lower value trade secret theft cases.............................................. .....73Figure 11: Graph of sanctions from low-value trade secret theft cases............................74Figure 12: Chart of double EEA penalties.......... ................................................... ..........81
113 Figure 13: Effect of double punishment............ ................................................... ...........82Figure 14: Data from corporate spies.............. ................................................... ............100Figure 15: The EEA according to professional spies ................................................... ..102
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