Intellectual property theft emerging as hot issue in U.S. oil and gas industry

MANAGEMENT PERSPECTIVE
Intellectual Property

Stephen S. Hodgson
Pravel, Hewitt, Kimball & Krieger, P.C.
Houston

In the U.S. oil and gas industry, technology, know-how, and confidential business information are helping more and more to determine the degree of success enjoyed by companies.

In some cases, intellectual property may be best protected under patent laws, but in other cases intellectual property may be better protected if kept confidential or secret. With the fast pace of change in the oil and gas industry today, it can be difficult to keep a secret, because there are so many routes by which secrets can be lost, such as through former employees, contractors, and consultants.

The theft of a trade secret for a long time has been and still is subject to a civil lawsuit in many states and to criminal action in some states, including Texas-home to most U.S. oil and gas operating and service/supply companies.¹

However, now the theft of a trade secret may also be subject to federal criminal action. With the passage by the U.S. Congress of the Economic Espionage Act² (EEA) of 1996, the theft of a trade secret is now a federal criminal offense. A person convicted under the EEA can be both fined and imprisoned, and an organization can be convicted and fined. Individuals, such as employees, therefore need to refrain from activities that may constitute trade secret theft.

Recourses, liability

Companies need to know what new recourses are available if the company is a victim of trade secret theft and, on the other hand, how a company may avoid trade secret theft liability.

The EEA's definition of a trade secret covers all forms and types of scientific, technical, business, and financial information, including designs, plans, methods, techniques, processes, programs, and codes.

However, the owner of the information must have taken reasonable measures to keep the information secret, and the information must have economic value apart from not being generally known to the public.

Trade secret information may be kept in writing and as drawings, photographs, or other images that may be stored electronically..³

Economic espionage

The nature of the beneficiary of a stolen trade secret is a distinguishing factor in determining the penalties for trade secret theft.

Referred to as "economic espionage," one section of the EEA applies to trade secret thefts that benefit an entity that is substantially owned or controlled by a government foreign to the U.S.

Any person or organization that steals, attempts or conspires to steal, receives, or otherwise obtains a trade secret without authorization, or copies, sketches, photographs, downloads/

uploads, or otherwise conveys a trade secret is liable under the EEA.4

If a person or an organization, such as a corporation, steals or receives a trade secret, intending or knowing that the theft will benefit a foreign government, then the person can be fined up to $500,000 or imprisoned up to 15 years, or both, and an organization can be fined up to $10 million.⁵

Theft of trade secrets

Another section of the EEA deals with trade secret theft where a foreign government is not involved.

If a trade secret theft does not benefit a foreign government, the EEA has an additional requirement that the trade secret be related to or included in a product.⁶

There is a further requirement that one who steals or receives a trade secret must intend or know that the offense will injure the owner of the trade secret, such as by lost sales or profits.

Punishment is handled differently in this case. Individuals can be fined up to $250,000 (or possibly more, at the discretion of the court⁷) or imprisoned up to 10 years, or both.⁸ A convicted organization can be fined up to $5 million.

Criminal forfeiture

The EEA has a criminal forfeiture provision like that used to confiscate property from convicted drug dealers. ⁹

Any property constituting or derived from or any proceeds derived from the theft of a trade secret may be forfeited to the U.S. government.

Further, any of the person's property used, or intended to be used, to commit or facilitate the theft of the trade secret is also subject to forfeiture at a court's discretion.

Administrative or judicial proceedings relating to seizures and disposition of property are handled under the same laws as are used for illegal drug cases.

Hypothetical scenario

As an example of how the EEA may apply, assume that Company X is incorporated in the U.S. and is publicly traded on the New York Stock Exchange.

Company Y, on the other hand, is owned by a non-U.S. government.

Geologists for Company X have located a hot new prospect somewhere outside the U.S. using 3D seismic analysis. While attempting to obtain an exploration drilling lease, Company X maintains its 3D seismic data as proprietary and takes reasonable measures to keep the information secret.

Company Y hires an employee of Company X, who is privy to the 3D seismic data. The employee has a solid working knowledge of the 3D seismic data but does not physically take any copy of the data. The employee uses his or her knowledge of Company X's trade secret 3D seismic data to influence Company Y's bidding plans for the same exploration lease on which Company X is bidding.

Company Y has raw field seismic data provided by the national government where the prospect is located, but Company Y does not have its own processed 3D data. Yet, Company Y outbids Company X and wins the drilling lease for the prospect. Company Y then gets its own seismic survey and, based on that survey, drills and finds commercial hydrocarbons.

Company X suspects that Company Y was privy to Company X's trade secret information and would not have otherwise known to bid on the exploration lease containing the hot prospect. Company X sues Company Y in civil court for trade secret misappropriation and obtains evidence indicating that Company X's former employee divulged Company X's trade secret information to Company Y. Company X then persuades the U.S. Department of Justice (DOJ) to prosecute the employee and Company Y under the EEA. The DOJ prosecutes the criminal case, while Company X handles the civil case.

Legal distinctions

Congress did not intend for the EEA to inhibit the movement of an employee from one company to another or to inhibit his or her use of his or her general knowledge and skills at a new company.

However, where an employee uses information that is a former employer's trade secret to benefit a new employer, causing economic injury to the former employer, that is a theft under the EEA.

If the employee knew that the 3D seismic data was a trade secret and that Company X had taken reasonable measures to keep the information secret, then the employee may be subject to both civil and criminal penalties. Because Company Y is owned by a foreign government, under the EEA, the employee may be fined up to $500,000 or imprisoned up to 15 years, or both.

Company Y and its officers reside outside the U.S., and the drilling lease is in a foreign country. Even if the officers are not U.S. citizens, they may be personally subject to criminal penalty in the U.S. if found to have knowingly or intentionally received the trade secret and if an act in furtherance of the offense was committed in the U.S.¹⁰ If the officers recruited the employee in the U.S. with the intent of obtaining the trade secret, then this may be an act in furtherance of the crime.

Next, it would be determined whether Company Y itself were subject to penalty. Regardless of whether the officers of Company Y were found guilty, Company Y may itself be subject to both a fine of up to $10 million and forfeiture.

Prevention

To reduce the risk of criminal liability, a company needs to have a compliance plan in place to prevent unauthorized use of another company's trade secrets.

This requires procedures and training to prevent wrongful incorporation of another company's trade secrets into a company's knowledge base. Employees must be trained to be sensitive to these issues, and new hires must be especially sensitized to distinguish between their general knowledge and knowledge that is a trade secret of his or her former employer(s).

Consultants provide a potential problem source of trade secrets, so care must be exercised to prevent the wrongful intake of trade secrets through the work of a consultant.

Subsidiaries and joint venture partners can subject a company to liability. Preventive measures are largely customized but may include review of employment agreements and adherence to confidentiality agreements.

The compliance plan should monitor for potential incorporation of unauthorized trade secrets, as well as for potential losses of the company's own trade secrets.

Self-policing is necessary, and reporting requirements should be clear. Violators should be subject to appropriate disciplinary measures to motivate conformance with the compliance plan.¹¹ With a sound compliance plan in place, a U.S. company or foreign government can reduce the risk of both criminal and civil penalties and teach employees that stealing trade secrets is not only unethical but also a serious crime.

1. Texas Penal Code Annotated ' 31.05 (Vernon 1994).
2. 18 U.S.C. '' 1831-39.
3. 18 U.S.C. ' 1839(3).
4. 18 U.S.C. '' 1831-32.
5. 18 U.S.C. ' 1831.
6. 18 U.S.C. ' 1832(a).
7. 18 U.S.C. ' 3571(d).
8. 18 U.S.C. ' 1832(a) and 18 U.S.C. ' 3571(b)(3).
9. 18 U.S.C. ' 1834.
10. 18 U.S.C. ' 1837(2).
11. James H.A. Pooley, Mark A. Lemley and Peter J. Loren, Understanding the Economic Espionage Act of 1996, Texas Intellectual Property Law Journal, Vol.5, No. 2, pp. 177, 222 (Winter, 1997).

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