§ 5.08 Whether to Make a Criminal Referral? Parallel Proceedings in Trade Secret and EEA Cases
| Jurisdiction | United States |
| Publication year | 2020 |
§ 5.08 Whether to Make a Criminal Referral? Parallel Proceedings in Trade Secret and EEA Cases
When a company becomes a victim of theft of trade secrets, it has three options. First, it can report the matter to the government for criminal investigation. Second, it can investigate the matter itself and, if warranted, can bring a civil suit for theft of trade secrets under state law or the DTSA. Or third, it can do both. Victims, however, should consider carefully whether to threaten a putative defendant with criminal prosecution as part of the civil litigation process. While the ABA Model Rules of Professional Conduct do not expressly address the issue and an ABA formal ethics opinion permits a lawyer to use a threat of criminal referral to obtain advantage if the civil claim and criminal matter are related and well-founded, a number of states follow the ABA Model Code of Professional Responsibility which explicitly prohibited strategic threats of prosecution.895 The option selected should depend on the circumstances of the theft and an understanding of the pros and cons of each option.
In evaluating whether to refer a case to the government for prosecution, a victim must weigh the advantages of a criminal prosecution against the disadvantages. In response to the question as to why a victim should report intellectual property crime, the government responds as follows:
"Intellectual property is an increasingly important part of the United States' economy representing its fastest growing sector. For example, in 2002, copyright industries alone contributed approximately six percent, or $626 billion, to America's gross domestic product, and employed four percent of America's workforce, according to an economic study commissioned by the International Intellectual Property Alliance. As the Nation continues to shift from an industrial economy to an information-based economy, the assets of the country are increasingly based on intellectual property.
"In recognition of this trend, the Department of Justice is waging the most aggressive campaign against the theft and counterfeiting of intellectual property in its history. The priority of criminal intellectual property investigations and prosecutions nationwide has been increased and additional resources on both the prosecutive and investigative levels have been brought to bear on the growing problem of intellectual property theft.
"Effective prosecution of intellectual property crime, however, also requires substantial assistance from its victims. Because the holders of intellectual property rights are often in the best position to detect a theft, law enforcement authorities cannot act in many cases unless the crimes are reported in the first place. Once these crimes are reported, federal law enforcement authorities need to quickly identify the facts that establish jurisdiction for the potential intellectual property offenses, such as federal copyright and trademark registration information, as well as facts concerning the extent of the victim's potential loss, the nature of the theft, and possible suspects. In a digital world where evidence can disappear at the click of a mouse, swift investigation is often essential to successful intellectual property prosecutions."896
It is important, therefore, for the victim to carefully conduct such an analysis. The EEA can provide a number of important benefits to a trade secret owner. First, criminal prosecution is an extremely effective deterrent and demonstrates that a company will take whatever steps are necessary to protect its proprietary and confidential information. This is an especially important consideration since many, if not a majority of theft of trade secrets, are committed by "insiders" who undoubtedly will think twice before engaging in theft if they know that they will be criminally prosecuted. An employee may jeopardize his job with a company but it is very unlikely that he will risk his entire future.
Second, because the federal government pays all costs, a corporation can greatly reduce its legal expenses by not having to hire private lawyers to litigate its claims. These costs can amount to tens of thousands or hundreds of thousands of dollars, and are a serious impediment to those seeking remedies through civil proceedings. Federal law also provides that the victim of a crime may obtain restitution for its losses. Thus, a corporation may be entitled to financial recovery without having to incur legal costs.897
Finally, criminal cases usually reach trial faster, reflecting the requirements of the Speedy Trial Act898 as well as constitutional imperatives. Thus, a corporation that wants to put a matter to rest as quickly as possible, but does not want to ignore the matter, should consider making a criminal referral.
On the other hand, criminal prosecution is not without disadvantages. The most significant single negative factor is the victim ceding control of the process to the government, which may or may not have the same interests as the victim. Thus, it is imperative for the victim to understand that once the matter is referred to the government, it may be very difficult if not impossible for the victim to convince the government to abandon the case. For example, even if the victim and the defendant agree as part of a civil settlement that the victim should request that the government drop
its criminal case, it is unlikely that the government would do so especially if the government prosecutors believe that is important to send a message. In other words, the greater good would prevail over the self-interests of the victim. Similarly it may be in the interest of the victim to have the government negotiate a plea with the defendant as early in the process as possible to avoid the risk of further disclosure of the trade secret, whereas the government's interest may lie in litigating the case for maximum publicity and the possibility of a lengthy sentence for its overall deterrence value. The bottom line is that the victim cannot force a federal prosecutor to dismiss a case because the defendant expresses a willingness to stipulate to an injunction, has otherwise compromised the claim, or because of concerns about disclosure of the trade secret.899
Civil litigants should be aware that the government may move to stay a parallel civil proceeding where the effectiveness of the criminal investigation may be placed in jeopardy.900 The government states that:
"the "potential for parallel proceedings raises . . . strategic considerations in EEA prosecutions. While evidence gathered by a trade secret owner in a civil action may assist in developing a criminal case, there is also the potential such evidence may be damaging to a criminal investigation. For example, defendants in civil trade secret proceedings are entitled to liberal discovery, which they use to poke holes in both the secrecy of the alleged trade secret information and in the security measures employed by the victim. Defendants may pursue extensive third-party discovery designed to show that the allegedly secret information is, in fact, known to a variety of entities. Similarly, depositions of employees of the owner of the alleged trade secret information could result in conflicting testimony on what they understand to be secret and not secret. Aggressive discovery could also be employed in an attempt to harass employees of the victim company. In such circumstances, the government may consider bringing a motion to stay the parallel civil proceeding. See generally Federal Grand Jury Practice, § 12.9 (discussing motions to stay in detail). Of course, doing so will require making the pending criminal investigation known to its subjects."901
This is a two-step process; first the government must seek the court's authorization to intervene in the civil action, as a third party, for the limited purpose of moving for a stay; and second, the government must then establish that the interests of justice of federal criminal laws require a stay of discovery in the civil action.
Pursuant to Rule 24 of the Federal Rules of Civil Procedure a party may intervene as "of right" where a party has:
"an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant's ability to protect that interest, unless the applicant's interest is adequately represented by existing parties."902
Rule 24(b) allows permissive intervention within the trial court's discretion "when an applicant's claim or defense and the main action have a question of law or fact in common. Courts have generally permitted the government to intervene under Rule 24(b) for the purpose of filing a motion to stay a parallel civil action.903 The government must show that the motion was filed in a timely manner and that there is nexus between the factual or legal issues in the civil trade secret action and the criminal action.
If the government is permitted to intervene, the court has complete discretion to decide whether to stay the civil proceedings or otherwise limit the scope of the civil discovery.904 In deciding whether to exercise its discretion to enter a stay of the civil action courts have applied the following five factor test:
"(1) the interest of the plaintiffs in proceeding expeditiously with [the] litigation or any particular aspect of it, and the potential prejudice to plaintiffs of a delay; (2) the burden which any particular aspect of the proceeding may impose on defendants; (3) the convenience of the court in the management of its cases and the efficient use of judicial resources; (4) the interests of persons not parties to the civil litigation; and (5) the interest of the public in the pending civil and criminal litigation."905
In addition, other factors which may be considered include overlapping factual issues in the civil and parallel criminal...
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