On April 11, 2012, the U.S. Court of Appeals for the Second Circuit issued its eagerly-awaited opinion explaining its reasons for vacating the conviction of former Goldman Sachs’ programmer, Sergey Aleynikov, under the Economic Espionage Act (EEA). A New York jury had convicted Aleynikov in December 2010 of stealing source code for Goldman’s high frequency trading (HTF) program under the EEA. On appeal, Aleynikov successfully argued that the source code was not related to a product “produced for . . . interstate or foreign commerce” under §1832(a) of the EEA. 

Did the Second Circuit get it right or wrong? And what are the ramifications of the decision, particularly now that Congress is contemplating adding a civil remedy to that section of the EEA? (I have attached a PDF of the decision below). 

Unfortunately, I think the Second Circuit’s analysis is wrong, for the reasons that I explain below. Fortunately, however, Congress has the opportunity to rectify that mistake as it deliberates over the Kohl/Coons Amendment to the EEA. 

Background: Aleynikov was responsible for developing Goldman’s HFT computer programs for various commodities and equities markets. In April 2009, Aleynikov resigned from Goldman and accepted a job at Teza Technologies to help develop that firm’s own version of a computer platform that would allow Teza to engage in HFT.

On his last day, Aleynikov transferred thousands of computer files, including source code to the HFT trading system, to a server in Germany that was not blocked by Goldman’s firewall. That evening, at his home, Aleynikov downloaded the material from the German server to his personal computer and then to his laptop and a thumb drive so that he could make it available to Teza.

My Concerns About the Second Circuit’s Analysis: The conviction and its reversal have generated a fair amount of buzz in the blogosphere, partly because Goldman remains a lightning rod in any debate and party because some members of the open-source community feel that he did nothing wrong. I don’t have a dog in either fight, and but I would note that, whatever your opinion of Goldman, Aleynikov’s conduct (downloading the software to a German server, deleting evidence of the transfer, etc.) falls well short of someone who believed he was copying open source code not proprietary to Goldman. But whether prosecutors should have indicted him is not the subject of this post. 

Turning to the Second Circuit’s opinion, I, too, struggled with some of the issues that vexed the court when it tried to read the language of §1832(a) as a whole, and give meaning to all of the statutory language at issue. Nevertheless, the Second Circuit has effectively read the words “produced for” out of the statute. 

Here is the key passage from the opinion:

Goldman’s HFT system was neither ‘produced for’ nor ‘placed in’ interstate or foreign commerce.  Goldman had no intention of selling its HFT system or licensing it to anyone. . .. It went to great lengths to maintain the secrecy of its system.  The enormous profits the system yielded for Goldman depended on no one else having it.  Because the HFT 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 offense under the EEA.”

But if Goldman’s HFT system was not produced for interstate or foreign commerce, then for what was it produced? The software was certainly not produced for development purposes or limited to research. Although it was not physically placed in commerce or actually sold in commerce, it was certainly produced for interstate commerce — namely, to facilitate the profits for Goldman identified by the court.

Essentially, the Second Circuit imposed a requirement that the product be intended to be sold in an open market to qualify for prosecution under the EEA. In its opinion, the Second Circuit reasoned the words “produced for” had likely been intended to cover a prototype or developmental product, but the court could not identify any particular legislative history in support of that position. Had Congress intended that narrow construction, it would have selected those words or at least supplied legislative history demonstrating that was what those words were meant to convey.

In sum, the Second Circuit was troubled that the interpretation applied by the district court was simply too broad.  However, the district court’s interpretation was consistent with the language of §1832. In other words, the language is what the language is. If the Second Circuit instead believed that the statute was facially ambiguous because of the breadth of that language (a point it briefly made), then that should have been the basis of its decision.

In a concurring opinion that has garnered some interest, Justice Guido Calabresi wrote that Congress probably intended to criminalize this type of conduct and he “express[ed] the hope that Congress will return to the issue and state in appropriate language, what I believe they meant to make criminal in the EEA.” I have to confess that if Justice Calabresi thought that was the intent, and if the words were present in the statute, he should have dissented rather than joining in the opinion.

What are the Ramifications of this Decision? The obvious fallout is that prosecutors in the Second Circuit have lost the ability to prosecute anyone for the theft of software not actually included in a product that is sold or is being developed to be sold in the open market. (Peter Toren makes the interesting observation that federal prosecutors could have avoided this problem if they had included a criminal copyright claim). It remains to be seen whether other federal courts will follow the Second Circuit’s lead. 

My greater concern is the impact this decision may have on the Kohl/Coons Amendment to the EEA that is still in Committee. As readers of this blog will recall, that Amendment adds a civil remedy to §1832 (but not to §1831, which is the provision that addresses trade secret theft for the benefit of a foreign power). As a result, any future civil cases could be restricted by this holding and certainly those in the Second Circuit. Fortunately, there may be an opportunity to rectify the request voiced by Justice Calabresi and provide language that resolves this issue.

U.S. v. Aleynikov.pdf (85.90 kb)