• Intellectual Property Theft: Criminal Prosecutions on the Rise
  • October 21, 2003
  • Law Firm: Piper Rudnick LLP - Washington Office
  • Civil claims for infringement are an active and well-established means for enforcing intellectual property rights in patent, trademark, trade secret, and copyright. However, in response to the incredible advances in digital technology over the past decade, and the concomitant opportunity for theft or misappropriation, Congress has significantly expanded the potential for criminal liability. As a result, the consequences of an infringement are now much higher, with potential findings of criminal liability for the individuals involved, in addition to the monetary damages in related civil suits.

    The No Electronic Theft Act

    Copyright infringement as a criminal offense was strengthened by passage of the No Electronic Theft (NET) Act1 in 1997. Prior to the NET, a person or entity could infringe an unlimited number of copyrights without facing criminal liability only so long as the infringement was done without a profit motive. However, the NET makes it illegal to reproduce or distribute on a large scale any copyrighted works, such as software programs, even if the defendant acts without a commercial purpose or for private financial gain.

    Under the NET, copyright infringement is a misdemeanor crime if it is done willfully2 and either (a) for commercial advantage or private financial gain, or (b) by making or distributing one or more copies of copyrighted works that have a total retail value in excess of $1,000 within a 180-day period.3 Felony criminal liability is only established if the willful infringement involves a minimum of ten copies of copyrighted works with a retail value of more than $2,500 within a period of six months.4 Sentencing under the NET can include substantial fines and imprisonment of three to ten years, depending on whether there are prior offenses.5

    Recent prosecution activity under the NET reported by the United States Department of Justice at www.usdoj.gov/criminal/cybercrime mainly involves many defendants accused of illegally copying and distributing copyrighted computer software over the Internet. Theft of copyrighted material, such as source code, can occur by persons and among competing corporations and would also be susceptible to federal criminal charges if the required quantity and value of copyrighted source code was knowingly misappropriated.

    In the face of the particularly high exposure of software products to copyright theft, software producers have been facing acute losses that are meant to be addressed under the NET. For instance, in United States v. Jou,6 the defendant admitted that by doing business through two separate companies, he provided brand-name software at prices below market retail. He admitted to obtaining illegally copied software, as well as labels, certificates of authenticity, manuals, and licensing agreements that were counterfeit or stolen. He then packaged and distributed these materials, or caused them to be packaged and distributed, along with the illegally reproduced software, to make it appear the illegally copied software was legitimate brand-name software when, in fact, it was not.

    In imposing sentence, the court found that the defendant had sold over $942,000 in illegally replicated software, and that he had supervised others in his criminal enterprise. The court adopted the Department of Justice's recommendation that the defendant receive a prison sentence near the high end of the applicable sentencing guidelines.

    The Economic Espionage Act

    In 1996, Congress passed the Economic Espionage Act (EEA).7 The EEA imparts criminal liability for the theft or misappropriation of trade secrets as well as any attempt or conspiracy to steal or misappropriate trade secrets. Prior to passage of the EEA, there were very few legal options available at the federal level for policing ownership of these assets. The few federal laws that did touch upon trade secret theft were not broad enough to reach the kinds of trade secret theft being perpetrated, or strong enough to adequately punish this activity. In addition, significant variations remained in the ways trade secret law had developed at the state level. The civil remedies provided by these state laws were often inadequate in compensating a business for the theft of trade secrets.

    Sections 1831 and 1832 of the EEA are directed to different types of defendants. Section 1831 specifically punishes someone who intends or knows that the violation of the Act will benefit a foreign government, instrumentality, or agent, as those terms are defined in Section 1839. In contrast, Section 1832 targets trade secret theft more generally, without regard to its benefits to a foreign entity. Section 1831 applies to the theft of either products or technical skills unrelated to a product, while Section 1832 is more limited to addressing theft of a trade secret "that is related to or included in a product." Each statute uses broad terms to embrace both direct and indirect theft of a trade secret, including its alteration or destruction.

    Individuals and organizations convicted of violating Sections 1831 and 1832 are subject to severe penalties. Persons convicted of violating Section 1831 may be fined up to $500,000 or imprisoned up to 15 years, or both, while any organization that commits any offense prohibited by Section 1831 may be fined up to $10,000,000. A person convicted of violating Section 1832 faces a fine of up to $500,000 or a prison sentence of up to 10 years, or both, while any organization that commits any offense described in Section 1832 may be fined up to $5,000,000.

    Enforcement of the EEA against foreign espionage has been limited to only two indictments to date.8 In one indictment, United States v. Ye, two former employee engineer defendants are alleged to have conspired to steal trade secrets used to construct and sell computer microprocessors. The engineers were arrested at San Francisco International Airport with tickets for China and allegedly had trade secrets in their possession for transport out of the country. In the other indictment under Section 1831, United States v. Okamoto, a Kansas University professor is accused of stealing DNA genetic material and cell line reagents and constructs that were developed by researchers employed by the Cleveland Clinic Foundation (CCF). The indictment includes two counts of economic espionage by (1) stealing these trade secrets that were property of the CCF, and (2) for altering and destroying trade secrets that were the property of CCF.

    In contrast, there have been scores of prosecutions at the domestic level under Section 1832 against theft by competitor corporations, insider employees, and ex-employees, and against theft by a third party for sale to another. The victims included both large publicly traded companies and smaller entities. The trade secrets involved in the indictments have included, among others, advanced computer microprocessors, business method proposals, and software products.

    Patent Infringement and Related Crimes

    In the United States, there is no criminal liability for patent infringement. Enforcement on a civil claim ordinarily occurs a number of years after the underlying patent application has been drafted and filed. Enforcement can only occur after the resulting patent has issued. Trade secrets can often be patent rights in the formative stage and if misappropriated may be addressed as trade secret theft under Section 1831 and 1832 of the EEA.

    Another saving grace of the intellectual property system in the United States is that patent rights are granted based on the concept of "first to invent" and not first to file a patent application, as in other countries. Often, it can be reasonably suspected that the knowledge associated with an invention has been misappropriated when a plurality of entities all file patent applications directed to the same invention. Even without evidence to support an indictment under the EEA, actual ownership of a patent right may still be determinable in an interference proceeding before the United States Patent and Trademark Office. An interference can be pursued provided that patent application filing formalities and prosecution efforts have been pursued toward obtaining patent rights on the same invention by the interested parties.

    The Trademark Counterfeiting Act

    Congress reacted to the concerns of brand owners about the growing threat of counterfeiting by enacting the Trademark Counterfeiting Act (TCA) in 1984.9 The TCA provides both criminal sanctions for trademark infringement as well as civil relief, including the ex parte seizure and destruction of the counterfeit products.10

    Unlike the prosecution of criminal copyright infringement, there is no threshold minimum retail value to establish felony trademark infringement. The TCA provides that "[w]hoever intentionally traffics or attempts to traffic in goods or services and knowingly uses a counterfeit mark on or in connection with such goods or services shall, if an individual, be fined not more than $2,000,000 or imprisoned not more than 10 years, or both, and, if a person other than an individual, be fined not more than $5,000,000." Additional offenses can lead to imprisonment for up to 20 years and fines of up to $15 million.11

    Under the TCA, the term "traffic" is broadly defined to cover all types of commercial activity, including manufacturing, distribution, and sales. The term "counterfeit mark" means a mark that is "identical with, or substantially indistinguishable from, a mark registered" with the United States Patent and Trademark Office, or protected by the Lanham Act.12 To determine whether there is criminal or civil liability under the TCA, the test that courts have adopted is whether a "likelihood of confusion" exists in the marketplace with the general public between the registered and counterfeit mark.13 Cases, such as United States v. Jou noted above, may be simultaneously prosecuted under both the TCA and the NET.

    Increased Scope of Infringement Based on Criminal Liability

    The enhanced potential for criminal liability in addition to civil claims considerably increases the risks associated with intellectual property infringement. At the same time, the access provided by recent advances for the reproduction and communication of protected property using digital technology makes the potential for such criminal liability all the more prevalent. This is also true for the innocent infringer, who is merely seeking information for a competitive advantage in the marketplace. Safeguards through employee training and internal controls of corporate practice can minimize this exposure, but vigilance is necessary.

    1 No Electronic Theft Act (NET, Pub. L. No. 105-147).
    2 "Willful," for purposes of criminal copyright laws, means the voluntary, intentional violation of a known right. See, e.g., United States v. Manzer, 69 F.3d 222, 227 (8th Cir. 1995); United States v. Cross, 816 F.2d 297, 300 (7th Cir. 1987).
    3 17 U.S.C. § 506(a)(2) and 18 U.S.C. § 2319(b)(3), (c)(3).
    4 18 U.S.C. § 2319(b)(1).
    5 18 U.S.C. § 2319(b), (c).
    6 United States v. Jou, (N.D. Cal.) (sentenced July 8, 2003). See www.usdoj.gov/criminal/cybercrime/eeapub.htm.
    7 Economic Espionage Act (EEA, Pub. L. No. 104-294), codified at 18 U.S.C. §§ 1831-9.
    8 United States v. Okamoto (N.D. Ohio), (filed May 1, 2002); United States v. Ye (N.D. Cal), (filed Dec. 4, 2002). See www.usdoj.gov/criminal/cybercrime/eeapub.htm.
    9 Trademark Counterfeiting Act (TCA, Pub. L. No. 98-473).
    10 See 18 U.S.C. § 2320, 15 U.S.C. § 1116(d)(1)(a).
    11 See 18 U.S.C. § 2320(a).
    12 See 18 U.S.C. § 2320(e)(1).
    13 See 18 U.S.C. § 2320(d)(1)(A)(iii); and compare 15 U.S.C. § 1114(1)(b) (Lanham Act).