Goldman code theft 'beyond scope of law'

Joel Reidenberg in The Financial Times, April 11, 2012

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A US appeals court dealt a blow to government efforts to crack down on corporate espionage by ruling that the theft of computer codes does not violate two key pieces of criminal legislation.

The Second Circuit Court of Appeals said, in a unanimous opinion, that computer codes allegedly stolen by a Goldman Sachs programmer heading to a rival firm did not fit within the two intelligence laws he was charged with violating, including the 1996 Economic Espionage Act.

“We decline to stretch or update statutory words of plain and ordinary meaning in order to better accommodate the digital age,” the court said.

The written opinion is a fuller explanation of a three-sentence ruling made in February, when the court reversed the conviction of Sergey Aleynikov, the former Goldman programmer, and freed him from prison, where he was serving an eight-year sentence.

The decision “will make it very hard for federal prosecutors under federal law to criminalise theft of trade secrets”, said Joel Reidenberg, a professor at Fordham University’s law school. He said the decision did not stop companies from pursuing civil claims against employees.

“It was an unusual prosecution in that trade secret violations are primarily economic wrongs against a single company,” Mr Reidenberg said. “It would be like someone breaches a contract and now that becomes criminal.”

Prosecutors “were trying to push this as an example case because the leakage of confidential corporate information is increasing through hacks, economic espionage and wrongful forms of competition”, he added.

A spokeswoman for Preet Bharara, the US attorney whose office brought the case, declined to comment.

Mr Aleynikov was accused of stealing Goldman’s high-frequency trading codes when he uploaded them to a server in Germany before leaving Goldman to join Teza Technology, a Chicago company launching its own trading platform. He allegedly downloaded the code onto a flash drive and laptop.

In the opinion, the court made two key findings. It said “intangible property” such as computer code was “beyond the scope” of the National Stolen Property Act, which makes it a crime to knowingly transport stolen goods.

It added: “The later storage of intangible property on a tangible medium does not transform the intangible property into a stolen good.”

Because Goldman’s high-frequency trading system “was not designed to enter or pass in commerce, or to make something that does, Aleynikov’s theft of source code relating to that system was not an offence under the EEA”, which prohibits the theft of trade secrets produced for interstate commerce that benefit anyone but the owner.
Other laws could provide avenues for federal prosecutions depending on the circumstances of the case.