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Monday, July 06, 2015

Goldman Sachs Programmer Sergei Aleynikov's Saga to Acquittal - EEA and Secrecy Hysteria

Today marks the second time of a dramatic acquittal for Sergei Aleynikov, the Goldman Sachs programmer who was prosecuted and convicted first in federal court for economic espionage, served a year in federal prison, then had his conviction overturned. In my article, The New Cognitive Property: Human Capital Law and the Reach of IP I devote an entire section to the Aleynikov case, which I subtitled, Sergey Aleynikov’s Crime: Secrecy Hysteria as a Control Device. I also talk about the case in my new TED talk, Secrets and Sparks.

For those who have not followed the case, here is a little taste of it, from The New Cognitive Property. Sergey Aleynikov was a star programmer at Goldman Sachs. A month after leaving Goldman Sachs to work for a new company, Teza Technologies, he was arrested by the FBI, and later prosecuted and convicted under the Economic Espionage Act for stealing proprietary technology.  Goldman had accused Aleynikov of stealing computer code and sending himself 32 megabytes of source code. Immediately upon discovering the downloads, Goldman notified the FBI which promptly sent agents to arrest Aleynikov.  Aleynikov was sentenced to eight years in federal prison. Alyenikov worked as a programmer for Goldman’s high frequency trading platform where he, like other programmers, used open source software on a daily basis. Unlike the frequently practiced requirement of putting open source code back to the common pool after use and modification, Goldman had a one-way attitude about open-source. When Goldman programmers took open source, it became Goldman’s proprietary information. Goldman would not return the adjusted code to public domain, likely in violation of the open-source licensing agreements. 

In the introduction of Flashboys, Michael Lewis asks about the zealous prosecution of Alyenikov: "Why exploit the ignorance of both the general public and the legal system about complex financial matters to punish this one little guy? Why must the spider always eat the fly?"

Lewis, who investigated this case, described Alyenikov’s experience at Goldman, where he used open-source components to program new solutions. Alyenikov asked his boss if he could release the repackaged open-source back on the Internet and his boss told him it was now Goldman’s property. As Lewis described:

Open source was an idea that depended on collaboration and sharing, and Serge (Alyenikov) had a long history of contributing to it. He didn’t fully understand how Goldman could think it was O.K. to benefit so greatly from the work of others and then behave so selfishly toward them. “You don’t create intellectual property,” Alyenikov said. “You create a program that does something.”

 

The core logic of the open source initiative is that rewriting code from scratch for every new program is an utter waste of time, analogous to recreating mathematical proofs rather than using a calculator in every market transaction. During Alyenikov’s trial, his attorney presented evidence of identical pages of computer code: one marked with open-source license and the other a Goldman’s copy, with the open-source license removed and replaced with a Goldman Sachs logo.

             When Alyenikov quit his position at Goldman he agreed to remain in his position for six more weeks to help train others at Goldman and teach them what he knew. During that time, he mailed himself source code he had been working on that contained large amounts of the open-source code he had been using for two years intertwined with code he developed at Goldman. His claim at trial was that he sent this code to himself because he hoped to later disentangle the two and have the open source available if he needed a reminder of what he had used.

 There is no doubt that Alyenikov broke Goldman Sachs’ rules. There is also no doubt that employees are generally required to not divulge a company’s secrets. The claim in The New Cognitive Property is that trade secret law, like other areas of intellectual property, is a bargain between encouraging investment in innovation by protecting certain information and stimulating market competition by ensuring the use and dissemination of other information. Traditionally then, trade secret law, like other forms of IP, has boundaries: information deemed trade secret must be confidential, valuable, not generally known in the industry, and the company must exert reasonable efforts in maintaining its secrecy. And yet, while trade secret law like other pillars of IP is designed to promote innovation, it functions to regulate the relationship between firms and individuals. 

Using the lens of human capital, contemporary trade secrets have expanded both in subjectmatter, the type of information that can be deemed trade secret, and protection, the type of activities that are deemed misappropriation. The Alyenikov case illuminates both these trends toward cognitive property through recent developments in trade secret law, raising doubt about whether the original bargain struck in trade secrecy has been abandoned. In several ways, the case points to unbalanced controls over information beyond the actual secrecy of the information at stake. First, the evidence in the case pointed to the little value that the source code would have for anyone outside of Goldman. While Goldman’s system was an archaic patchwork, newer and faster systems were designed differently. Second, there was no actual use of the information taken. The only evidence presented in the case was testimony by Alyenikov’s new employer that he had absolutely no interest or use of the code. Rather, the new employer wanted to build something from scratch and testified that even if he were offered Goldman’s entire high-frequency-trading platform he would not have been interested. Third, much of the code was open source code that Alyenikov had taken from the Internet. He insisted convincingly to the panel of experts who examined the evidence post-trial that he took the code for those elements. For programmers like Aleynikov, the code is analogous to the pocketbook inventors used to carry around everywhere. One of the experts considering the evidence post-conviction explained:

In Serge’s case, think of being at a company for three years and you carry a spiral notebook and write everything down. Everything about your meetings, your ideas, products, sales, client meetings—it’s all written down in that notebook. You leave for your new job and take the notebook with you (as most people do). The contents of your notebook relate to your history at the prior company, but have very little relevance to your new job. You may never look at it again. Maybe there are some ideas or templates or thoughts you can draw on. But that notebook is related to your prior job, and you will start a new notebook at your new job which will make the old one irrelevant. . . . [It enables them] to remember what they worked on—but it has very little relevance to what they will build next.

Fourth, the manner in which Alyenikov downloaded the code was not of an inconspicuous thief as he emailed it to himself from work when he could have easily downloaded the information onto a thumb drive. Fifth, and perhaps most compelling, Alyenikov took very little, “eight megabytes in a platform that consisted of an estimated one gigabyte of code” and nothing of true value namely Goldman’s trading strategies – the secret sauce (“But that’s like stealing the jewelry box without the jewels,” said one of the post-trial experts). Sixth, procedurally, these questions were tried in the absence of actual expertise about the nature of the information and the allegations of its value. Both the FBI investigators who arrested Alyenikov and the jury who convicted him seemed to have little grasp of the world of high frequency trading and its trade secrets. Finally, the harsh consequences: the eight-year imprisonment of a former programmer, a father of three with no criminal record, for the act, common among programmers, of emailing his work to himself. 

In his new book, Flash Boys, Michael Lewis attempted to understand why Goldman fought pugnaciously under such non-threatening circumstances to make sure that a former star programmer would be sentenced to jail. Lewis asked, Why on earth call the F.B.I.? Why coach your employees to say what they need to say on a witness stand to maximize the possibility of sending him to prison?

The best explanation Lewis finds is that Goldman had to send a message to shareholders, competitors, and employees that their code is original and genius. If anyone discovered that 95 percent of it is open-source, it would kill Goldman’s reputation and the high bonuses of Goldman traders might suddenly seem less justifiable.

A year into his imprisonment, the Second Circuit Court of Appeals reluctantly overturned Aleynikov’s sentence on a technicality. The court found that the two statutes used for his conviction had loopholes. The National Stolen Property Act (NSPA) was written to cover only “goods, wares, merchandise, securities or money,” not intangible goods, while the Economic Espionage Act (EEA) covered the misappropriation of trade secrets that were designed to enter into inter-state commerce. Since Aleynikov did not remove anything physically out of Goldman’s offices, the NSPA did not apply. Because Goldman’s code was used internally and not for sale, the court ruled that it did not meet the EEA’s interstate commerce requirement.

 In his concurring opinion, Judge Calabresi called Congress to amend the EEA to cover the kind of information Aleynikov downloaded. Congress quickly reacted and closed the gap with a bipartisan vote and President Barack Obama signed the reform into law in late December 2012. The Act added the word “service” in addition to “product” such that it would include secrets used internally but that relate to activities, like high frequency trading, that involve interstate commerce. A month later, President Obama signed the Foreign and Economic Espionage Penalty Enhancement Act, which enhances the penalties under the Economic Espionage Act.

 Meanwhile, the Aleynikov case was transferred to New York state prosecutors and Aleynikov was criminally charged under state trade secret law, for the “unlawful use of secret scientific material” and “unlawful duplication of computer related material,” based on a signed complaint by the same federal agent who led the investigation of the federal prosecution. In May 2015 he was convicted after a one month trial of "unlawful use of secret scientific material," a violation of a rarely used 1967 state law. Today the judge has overturned the jury conviction, writing while Aleynikov "doubtless acted wrongly" by copying code from Goldman's servers before he left the investment bank in 2009, prosecutors "did not prove he committed this particular obscure crime."

 

 

 

Posted by Orly Lobel on July 6, 2015 at 11:33 AM | Permalink

Comments

Orin, yes these are all relevant questions - when we are looking at an employee who is leaving his job, not a cybercrime, and he takes (by way of saving on his jumpdrive or emailing himself) code that he had been working on, there has to be much more of a clear finding of intention to use, value, harm. even then not sure that criminal sanctions as opposed to civil litigation by a company like Goldman, which is harsh enough for the individual employee is justified. The EEA was meant originally for economic espionage of the foreign country sponsored kind and it has taken a turn for use in everyday run of the mill market competition.
And 8 years of jail time in this case? when he never opened the file he mailed himself? when the jury had no understanding of what was the code and what he could do with it had he opened it? Orin, does that not seem obviously disproportionate to you?

Posted by: Orly Lobel | Jul 13, 2015 3:32:16 AM

Orin, yes these are all relevant questions - when we are looking at an employee who is leaving his job, not a cybercrime, and he takes (by way of saving on his jumpdrive or emailing himself) code that he had been working on, there has to be much more of a clear finding of intention to use, value, harm. even then not sure that criminal sanctions as opposed to civil litigation by a company like Goldman, which is harsh enough for the individual employee is justified. The EEA was meant originally for economic espionage of the foreign country sponsored kind and it has taken a turn for use in everyday run of the mill market competition.
And 8 years of jail time in this case? when he never opened the file he mailed himself? when the jury had no understanding of what was the code and what he could do with it had he opened it? Orin, does that not seem obviously disproportionate to you?

Posted by: Orly Lobel | Jul 13, 2015 3:32:16 AM

Thanks, Orly. I'd be interested to know in what circumstances you think a criminal prosecution against a former employee who took company files would not be "overzealous and disproportional." Where's the line, in a case like Aleynikov, at which point you think a criminal prosecution is proper? Should it be when the file(s) copied is more clearly the work product of the company? When the file(s) copied has a certain dollar value? Never?

Posted by: Orin Kerr | Jul 6, 2015 10:16:36 PM

Orin, yes, I discuss the EEA amendments and the Agrawal case in the article, and Rochelle Dreyfuss and I are writing a new article about the EEA in its current state and the kinds of indictments we are seeing in the past few years. The point of delving into the Aleynikov case is not so much whether he technically violated either state or federal law or internal Goldman policy or not. The point is the overzealous and disproportional criminal prosecution against employees who leave their employers (or against potential competitors, often foreign) without, at least in some of these cases, sufficient basis or reason to perceive the unlawful/internal violation as a real threat. And indeed, as you point out, the amendments of the EEA are meant to further close any perceived loopholes.

Posted by: Orly Lobel | Jul 6, 2015 5:21:52 PM

(To be clear, both the state of Second Circuit caselaw and the statutory amendment presumed the facts as described in the Second Circuit's opinion rather than what may have come out in the state prosecution.)

Posted by: Orin Kerr | Jul 6, 2015 2:54:32 PM

I would also point out that Congress amended the EEA specifically in response to the Aleynikov decision in an effort to overturn the result in that case. See Theft of Trade Secrets Clarification Act of 2012, Pub.L. No. 112–236, 126 Stat. 1627 (providing for EEA to be amended to strike phrase “or included in a product that is produced for or placed in” and to insert phrase “a product or service used in or intended for use in,” so that relevant language now reads: “Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use in interstate or foreign commerce.”); 158 Cong. Rec. S6978–03 (daily ed. Nov. 27, 2012) (statement of Sen. Leahy) (observing that Aleynikov decision “cast doubt on the reach” of EEA, and that “clarifying legislation that the Senate will pass today corrects the court’s narrow reading to ensure that our federal criminal laws adequately address the theft of trade secrets”).

Posted by: Orin Kerr | Jul 6, 2015 2:51:17 PM

It's important to point out that Aleynikov's conduct was a felony violation of the EEA according to current Second Circuit caselaw: The problem with the Aleynikov prosecution was that it was indicted incorrectly, not that Aleynikov's conduct was legal. See United States v. Agrawal, 726 F.3d 235 (2d Cir. 2013) (affirming conviction on facts nearly identical to those in Aleynikov, and distinguishing Aleynikov based only on how the case was charged).

Posted by: Orin Kerr | Jul 6, 2015 2:49:19 PM

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