Second Circuit Reverses Convictions In Data-Theft Prosecution And Narrowly Interprets Federal Criminal Statutes With Important Intellectual Property Implications

In February 2012, following oral argument, the U.S. Court of Appeals for the Second Circuit issued a brief order reversing Sergey Aleynikov's convictions for violating the National Stolen Property Act, 18 U.S.C. § 2314 ("NSPA"), and the Economic Espionage Act, 18 U.S.C. § 1832(b) ("EEA"), and stating a longer opinion would follow. In that promised opinion, which was issued earlier this month, see United States v. Aleynikov, No. 11-1126 (2d Cir. Apr. 11, 2012), the appeals court explained why Aleynikov did not commit the charged federal crimes, and more importantly, it established significant limits on future federal prosecutions concerning the theft of intangible intellectual property.

Background

Before his troubles began, Aleynikov worked for two years as a computer programmer at Goldman Sachs & Co. There, he helped to write the source code for Goldman's proprietary high-frequency trading ("HFT") system, which makes large volume trades based on algorithms that incorporate rapid market developments and past trading data. Kept highly confidential and never licensed to any other parties, the HFT system was akin to the Wall Street bank's own secret formula for Coke. As an employee, Aleynikov was subject to strict confidentiality provisions that prohibited him from divulging this valuable trade secret.

Aleynikov had other plans, however. He decided to leave Goldman and join Teza Technologies, LLC, a financial firm in Chicago with plans to develop its own HFT system. (The government did not accuse Teza of any wrongdoing.) On his last day at Goldman, Aleynikov encrypted and uploaded source code from the HFT system to a server in Germany. After returning home that night, Aleynikov downloaded the data to his personal computer. He later made additional copies of the computer program on other devices, including a thumb drive and laptop, and also took steps to cover his electronic tracks. Aleynikov then traveled to Chicago to meet with representatives of Teza, and he brought the purloined source code with him. When he returned to New Jersey, he was arrested by the FBI at Newark airport.

At trial, Aleynikov argued that he only copied open source materials and never intended to harm Goldman. The jury was unconvinced and found him guilty. The trial court sentenced him to 97 months in prison. In its recent opinion reversing Aleynikov's convictions, the Second Circuit certainly did not condone his behavior -- repeatedly calling him a corporate thief and noting that his dishonest conduct breached his confidentiality obligations to his employer. But the court concluded, after closely analyzing the text of the criminal statutes and the relevant case law, that Aleynikov had not violated the NSPA or EEA. (The appeal related only to the criminal prosecution, and it did not address whether or how Goldman might sue Aleynikov for money damages.)

Computer Fraud and Abuse Act

Although not part of the appeal, Aleynikov was also charged with violating the Computer Fraud and Abuse Act ("CFAA"), 18 U.S.C. § 1030, which prohibits accessing computers without authorization in certain specified situations that the statute describes (for example, protected computers containing national security information). Aleynikov moved to dismiss that charge, and the trial court granted his motion. As the Second Circuit recounted, the trial court concluded that, as an employee, Aleynikov was authorized to access Goldman's network; that as a programmer who worked on the HFT system in particular, his access to that source code did not exceed his authorization; and perhaps most critically, that his...