Snippets
19 minute read

New York v. Aleynikov: New York State’s Penal Code (Like Federal Criminal Law) Does Not Cover Electronic Reproduction of Source Code

Joshua R. RichSummer 2015 (snippets)

In 2009, Sergey Aleynikov was a computer programmer employed by Goldman Sachs to write high-frequency trading code. He accepted an offer to join a new Chicago-based company, Teza Technologies. Before he left Goldman Sachs, however, he sent portions of Goldman’s high frequency trading code to a German server for his own future use. After Goldman found out, it went to the FBI; Aleynikov was then arrested on a flight home from a visit to Chicago. With that arrest began a circuitous journey through the U.S. legal system, governed by two different sovereigns and under two different legal regimes – neither one of which was ultimately found to cover his actions.

Federal Prosecution of Aleynikov under the Economic Espionage Act and the National Stolen Property Act

Aleynikov was first tried[1] in the U.S. District Court for the Southern District of New York on charges of violating the Federal Economic Espionage Act of 1996 (“EEA”)[2] and the National Stolen Property Act (“NSPA”).[3] At that time, the EEA’s trade secret misappropriation section provided:

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 . . . [would be guilty of a criminal offense punishable by up to ten years in jail].[4]

The parties disputed the application of the EEA to Aleynikov’s behavior, Aleynikov’s intent in uploading the code to the German server, and the importance of the uploaded code. Ultimately, however, the jury found Aleynikov guilty under the EEA and NSPA.

The U.S. Court of Appeals for the Second Circuit interpreted the EEA and the NSPA more narrowly than the trial court. It stressed that the EEA had been adopted as a response to the Supreme Court’s decision that the relevant section of the NSPA (18 U.S.C. § 2314) did not apply to purely intangible property, as found in Dowling v. United States, 473 U.S. 207 (1985).[5] It then considered the differences in language between the economic espionage provision of the EEA (18 U.S.C. § 1831) and the trade secrets provision (18 U.S.C. § 1832). The former did not require that the information be “related to or included in a product that is produced for or placed in interstate or foreign commerce,” while the latter did.[6] Given the statutory language, the Second Circuit found that Goldman’s code was intended to remain confidential (and not be related to any product placed in interstate commerce).[7] It therefore overturned Aleynikov’s Federal conviction.

Remarkably, the Second Circuit’s decision in the Federal Aleynikov case subsequently led to a change in the EEA. Although it cannot apply to the Aleynikov case (under both the Constitution’s ex post facto clause and double jeopardy case law), § 1832 was amended to apply to any trade secret “that is related to a product or service used in or intended for use in interstate or foreign commerce.”[8] Thus, in future cases, misappropriation of computer code that is intended to remain confidential, but used in relation to a service performed in interstate commerce, will be an offense under the EEA.

State Prosecution of Aleynikov for Unlawful Use of Secret Scientific Material and Unlawful Duplication of Computer Related Material

After sitting in prison for over a year awaiting resolution of the Federal claims against him, Sergey Aleynikov thought he was no longer in jeopardy when the Second Circuit issued its opinion absolving him of criminal liability. Not true. Rather than returning Aleynikov’s computer, other evidence, and passport, the U.S. Attorney’s Office turned it all over to the New York County (Manhattan) DA’s office. Ultimately, that evidence was ruled to be illegally transferred and inadmissible as evidence against Aleynikov. The DA’s office nonetheless decided to prosecute Aleynikov.

The state court prosecution proceeded on three counts under two statutes: two counts of Unlawful Use of Secret Scientific Material (N.Y. Pen. L. § 165.07) and one count of Unlawful Duplication of Computer Related Material (N.Y. Pen. L. § 156.30).[9] The former statute provides:

A person is guilty of unlawful use of secret scientific material when, with intent to appropriate to himself or another the use of           secret scientific material, and having no right to do so . . . , he makes a tangible reproduction or representation of such secret scientific material by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material.[10]

The latter statute provides:

A person is guilty of unlawful duplication of computer related [material] . . . when having no right to do so, he or she copies, reproduces or duplicates in any manner: 1. any computer data or computer program and thereby intentionally and wrongfully deprives or appropriates from an owner thereof an economic value or benefit in excess of [$2,500].[11]

Aleynikov challenged his state indictment on numerous grounds, ranging from double jeopardy, to the high-frequency trading code not being “secret scientific material,” to not having made a “tangible reproduction or representation,” and to not having deprived Goldman of the value of the code. The trial court judge rejected those arguments and allowed the case to go forward to trial.

At trial in April 2015, Aleynikov argued that he had committed no crime, based both on his own lack of culpable intent and the technical language of the relevant statutes. The jury returned with a split verdict: guilty on one count of Unlawful Use of Secret Scientific Material, hung on the other count of Unlawful Use of Secret Scientific Material, and not guilty of Unlawful Duplication of Computer Related Material. After the jury verdict, Aleynikov renewed his motion to dismiss both counts of Unlawful Use of Secret Scientific Material; the trial court granted the renewed motion in a carefully reasoned 72-page decision issued on July 6, 2015.[12]

The trial court’s dismissal of the two counts of Unlawful Use of Secret Scientific Material rested on two separate grounds. First, the court found that the prosecution had not proved that Aleynikov had made “a tangible reproduction or representation of [any] secret scientific material.” Second, the court found that the prosecution had not proved that Aleynikov had the “intent to appropriate to himself or another the use of secret scientific material.” In both cases, the trial court’s decision was not based on a lack of evidence; rather, the trial court found that the act of making a copy of computer code was improper but could not violate the statute for either reason.

The trial court began its consideration of the renewed motion to dismiss with a review of the origins of the statute. The law was intended to be a counterpart to a larceny statute (N.Y. Pen. L. § 155.30(3)) that makes it a felony to “steal property” which consists of “secret scientific material.”[13] The difference between the two statutes was the physical act proscribed: in the case of the unlawful use statute, it was making a tangible reproduction or representation of scientific material; in the case of the larceny statute, it was taking the scientific material itself.[14] For example, the unlawful use statute would be violated by writing down the synthetic steps for making a product, whereas the larceny statute would be violated by stealing the product itself. In both cases, a violation required the accused to have the same intent to steal.[15] Both statutes grew out of a theft of trade secrets from the Lederle Laboratory Division of the American Cyanamid Company in which employees had taken confidential records and microorganisms used in the synthesis of antibiotics and steroids from Lederle and turned them over to be sold to other drug companies.[16]

The first key question confronting the trial court was what would constitute a “tangible” reproduction or representation because Aleynikov had made only a virtual copy of the disputed code; he had not printed it or otherwise copied it down. The trial court turned first to the dictionary for a definition of “tangible.” Black’s Law Dictionary (which the court found representative of dictionaries generally) had three definitions: “1. Having or possessing physical form; corporeal. 2. Capable of being touched and seen; perceptible to the touch; capable of being possessed or realized. 3. Capable of being understood by the mind.”[17]

In resolving which definition of “tangible” would apply, the court turned to four sources: canons of statutory construction, decisions under the EEA (based on the prior Aleynikov prosecution), New York state decisions construing similar statutes, and the Rule of Lenity.

The most important canon of construction for the trial court was the principle that every word in a statute must have a meaning and was assumed to have been inserted for a purpose.[18] The statute would not have been violated if a representation or reproduction had been imaginary or incomprehensible because there would be no economic value to appropriate, so tangible had to mean something other than merely real or comprehensible. The DA first argued that tangible meant that the reproduction or representation itself need not be tangible, only that it be able to be physically reproduced or represented.[19] Alternatively, the DA argued that the term “tangible” was intended to distinguish memories. [20] The court found the first option would still render the word superfluous in the statute, and the second defied common sense.[21] Further, the DA’s attempts at construction violated a second canon of construction, which was that statutes are to be construed according to their meaning at the time of enactment.[22] When the statute was enacted in 1967, even the computer-related media that were available (like fax machines or photocopiers) yielded tangible, paper copies of original documents. Thus, the court found that a physical definition of “tangible” was required.

Second, the distinction between a virtual copy of computer code and a “tangible” physical copy was also starkly shown in Federal jurisprudence under the EEA. After Aleynikov had been absolved of criminal liability by the Second Circuit, another defendant, Samarth Agrawal, argued that his conviction should also be reversed.[23] But Agrawal, unlike Aleynikov, had printed out code from his employer’s high-frequency trading system on paper. As the Second Circuit found, “[t]his makes all the difference.”[24] In addition, earlier in the state Aleynikov case, a different justice of the New York Supreme Court had suggested that the misappropriated source code was “intangible property” in contrasting the Agrawal case.[25]

Third, the court considered other criminal cases in which the nature of computer data was considered. New York’s child pornography statute required possession of illicit images; the New York Court of Appeals found that merely viewing, without knowledge that the images would be stored in a computer’s cache, did not satisfy that requirement.[26] The court relied heavily on that decision’s reasoning, as well as other cases in which computer data had been characterized as “intangible items,” to support a finding that computer data would not be a “tangible reproduction or representation.”[27]

Finally, the court considered the Rule of Lenity. In addition to all of the evidence that suggested that the term “tangible” did not apply, the Rule counsels that “[i]f two constructions of a criminal statute are plausible, the one more favorable to the defendant should be adopted.”[28] Thus, the court found that virtual computer code could not support a finding that Aleynikov made a “tangible reproduction or representation” and the conviction had to be overturned.

Similarly, the court found that Aleynikov could not have had an “intent to appropriate the use” of the high-frequency trading code. Under the New York Penal Law:

To “appropriate” property of another to oneself or a third person means (a) to exercise control over it, or to aid a third person to exercise control over it, permanently or for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit, or (b) to dispose of the property for the benefit of oneself or a third person.[29]

The former definition applies to the Unlawful Use of Secret Scientific Material statute, the latter definition to the larceny statute. Thus, there were two questions that the court had to answer. First, what does “the major portion of [property’s] economic value or benefit” mean? And second, can it be defined independently from the rightful owner’s retained value or is it a zero-sum definition?

Based on dictionary definitions and the context of the statute, the court found that “the major portion” would have to be the majority of the value.[30] Importantly, the definitional statute of “appropriate” uses the definite article, indicating that there can be only one major portion.[31] And a Federal district court considering the same question came to the same result, rejecting arguments that “the major portion” could be a significant, but minority, portion.[32]

The court also found that appropriation would have to be a “zero-sum game,” where a defendant would not only obtain benefits but also deprive the rightful owner of the same benefits. To the extent that such a result was not compelled by the relative definition of “the major portion,” it was supported by case law on larceny and the Rule of Lenity.[33] Because Aleynikov had not taken most of the value of the code from Goldman (and no evidence was introduced that supported a valuation of the code, its value to Aleynikov, or its remaining value to Goldman), his conviction could not stand.

Finally, despite the outcome of the Aleynikov case itself, the court noted that efforts were underway in the New York legislature to plug the holes into which the conviction had fallen.[34] While those updates to the law would not rescue Aleynikov’s conviction, they would have the same effect as the amendments of the EEA in punishing later misdeeds.

Despite the court’s careful decision and the steps already being taken to fix the statute, the prosecution chose to appeal the court’s dismissal of Aleynikov’s conviction. On July 24, 2015, it filed a notice of appeal. Thus, an appellate panel will consider whether conduct like Aleynikov’s could violate the Unlawful Use of Secret Scientific Material statute.

Conclusion

Sergey Aleynikov is in the remarkable position of having been tried twice for the same acts, having two juries find him guilty, but having been absolved by two different courts. He also has been the driving force between an amendment to a Federal statute and, most likely, his absolution will be the cause for an update of state laws as well. However, his situation goes to show how poor a fit current criminal statutes are to the fast-moving virtual world. That is one of the reasons that numerous parties have sought a Federal trade secrets law, which would allow private parties to bring civil suits to enforce their rights. Such a law, the Defend Trade Secrets Act of 2015, has been introduced in Congress and may prove to be the best tool for combatting acts like Aleynikov’s.



[1] United States v. Aleynikov, 737 F. Supp. 2d 173, 177, 185 (S.D.N.Y. 2010). Aleynikov was also indicted on a charge of unauthorized computer access in violation of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030(a)(2)(C), but that charge was dismissed by the trial court. Id. at 190–94.

[2] Economic Espionage Act of 1996, Pub. L. No. 104-294, §§ 1831–39, October 11, 1996, 110 Stat 3488.

[3] 18 U.S.C. §§ 2311–15 (2006).

[4] Economic Espionage Act of 1996 § 1832.

[5] United States v. Aleynikov, 676 F.3d 77, 82-83 (2d Cir. 2012).

[6] Id. at 79.

[7] Id. at 82.

[8] Pub. L. 112–236, § 2, Dec. 28, 2012, 126 Stat. 1627.

[9] People v. Aleynikov, No. 04447/12, slip. op. 1 (N.Y. Sup. Ct. July 6, 2015). The Manhattan DA’s office offered Aleynikov a plea bargain: if he pled guilty to one of the counts, they would agree to drop the other charges and seek no time beyond the one year he had already served awaiting trial on the Federal charges. Aleynikov rejected the plea deal.

[10] N.Y. Pen. L. § 165.07.

 

[11] N.Y. Pen. L. § 156.30.

[12] People v. Aleynikov, slip. op. at 72.

[13] Id. at 26–27.

[14] Id. at p. 27.

[15] Id.

[16] Id. at p. 28.

[17] Id. at p. 29.

[18] Id. at p. 32.

[19] Id.

[20] Id. at p. 33.

[21] Id.

[22] Id. at p. 35.

[23] United States v. Agrawal, 726 F.3d 235 (2d Cir. 2013).

[24] Id. at 252.

[25] People v. Aleynikov, slip. op. at p. 38–40.

[26] Id. at 40 (citing People v. Kent, 19 N.Y.3d 290 (2012)).

[27] Id. at 41–44.

[28] Id. at 44 (quoting People v. Golb, 23 N.Y.3d 455, 468 (2014)).

[29] N.Y. Pen. L. § 155.00(4).

[30] People v. Aleynikov, slip. op. at 49.

[31] Id.

[32] Id. at p. 50 (quoting Perfect Curve Inc. v. Hat World Inc., 988 F. Supp. 2d. 38, 60–61 (D. Mass. 2013)).

[33] Id. at 51–57.

[34] Id. at 69–72.

 

 

© 2015 McDonnell Boehnen Hulbert & Berghoff LLP 

snippets is a trademark of McDonnell Boehnen Hulbert & Berghoff LLP. All rights reserved. The information contained in this newsletter reflects the understanding and opinions of the author(s) and is provided to you for informational purposes only. It is not intended to and does not represent legal advice. MBHB LLP does not intend to create an attorney–client relationship by providing this information to you. The information in this publication is not a substitute for obtaining legal advice from an attorney licensed in your particular state. snippets may be considered attorney advertising in some states.