Intellectual Property Law Firm Florida

Computer Software Not Tangible Goods Under Federal Theft Statutes

The Second Circuit Court of Appeals reversed the conviction of Sergey Aleynikov, a computer programmer who stole Goldman Sachs’ extremely valuable and proprietary in-house high-frequency trading computer program, stating that the program’s source code (human readable code) was not a tangible good under the National Stolen Property Act (“NSPA”), 18 U.S.C. § 2314, and the Economic Espionage Act of 1996 (“EEA”), 18 U.S.C. § 1832.  U.S. v. Aleynikov, Case No. 11-1126 (2d Cir. Ap. 11, 2012) (available here). Defendant Programmer convinced the court that (1) the source code was not a stolen “good” under the NSPA (it was not tangible property – he only emailed the code to Germany) and (2) the source code was not “related” to a product “produced for a placed in interstate or foreign commerce” within the EEA (Goldman never sold or licensed the trading program, it only used the program in-house).

The established facts show that just before his going-away party, the Programmer encrypted and uploaded to a server in Germany more than 500,000 lines of source code for Goldman’s trading program, including algorithms and market data connectivity programs. Thereafter, the Programmer  deleted the encryption program as well as the history of his computer commands from Goldman’s computers..

The NSPA makes it a crime to “transport [], transmit [], or transfer [] in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.” 18 U.S.C. § 2314.  The statute does not define the terms “goods,” “wares,” or “merchandise.”  As for the NSPA count, the Programmer argued that the source code–as purely intangible property–is not a “good” that was “stolen” within the meaning of the NSPA.  The Second Circuit followed the Tenth Circuit case of  United States v. Brown, 925 F.2d 1301, 1305, 1309 (10 Cir. 1991) which found that the NSPA “applies only to physical ‘goods, wares or merchandise’” and that “[p]urely intellectual property is not within this category.  It can be represented physically, such as through writing on a page, but the underlying, intellectual property itself, remains intangible.”  Id. At 1307. See also the Seventh Circuit case regarding “Comdata codes” used by truckers to access money transfers at truck stops wherein the court held that the codes are intangible property which is not a violation of the NSPA.  United States v. Stafford, 136 F.3d 1109 (7th Cir. 1998). Also see United States v. Martin, 228 F.3d 1, 14-15 (1st Cir. 2000) and Dowling v. U.S., 473 U.S. 207 (1985).

“By uploading Goldman’s proprietary source code to a computer server in Germany, Aleynikov stole purely intangible property embodied in a purely intangible format.  There was no allegation that he physically seized anything tangible from Goldman, such as a compact disc or thumb drive containing source code, so we need not decide whether that would suffice as a physical theft.  Aleynikov later transported portions of the source code to Chicago, on his laptop and flash drive.  However, there is no violation of the statute unless the good is transported with knowledge that ‘the same’ has been stolen; the statute therefore presupposes that the thing stolen was a good or ware, etc., at the time of the theft.” Slip opn. p. 17.

As for the EEA count, the Programmer argued that the source code is not “related to or included in a product that is produced for or placed in interstate or foreign commerce” within the meaning of the EEA.  The EEA, 18 U.S.C. § 1832, provides: “Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly … without authorization … downloads, uploads, … transmits, … or conveys such information” is guilty of a federal offense, and may be imprisoned for up to 10 years.  Id. § 1832 (a). Goldman’s trading program was neither “produced for” nor “placed in” interstate or foreign commerce.  Goldman had no intention of selling its program or licensing it to anyone.  It went to great lengths to maintain the secrecy of its system.

“Even if we were to conclude that the phrase ‘produced for … interstate or foreign commerce’ is susceptible to a broader reading than we think it will bear, it would at most render § 1832(a) facially ambiguous, which would not assist the prosecution.  ‘[A]mbiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.’  Rewis v. United States, 401 U.S. 808, 812  (1971).  And ‘when choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before we choose the harsher alternative, to require that Congress should have spoken in language that is clear and definite.’  United States v. Universal C.I.T. Credit Corp., 344 U.S. 218, 221-22 (1952).”  Slip opn. P. 27-28.

Based upon the narrow construction of “goods” and “produced for or placed in,” the Second Circuit reversed the conviction of the defendant Programmer. The computer program was transmitted to Germany, not burned on a flash drive or CD and carried out from Goldman’s offices.  Further, Goldman did not license or sell the program to others and therefore the item was not produced for or provided in interstate commerce.

Tags: , , , , ,

Leave a Reply

Switch to our mobile site