Sunday, April 22nd, 2012

Remorse Code

United States v. Aleynikov, No. 11-1126 (2d Cir. April 11, 2012) (Jacobs, Calabresi, Pooler, CJJ)

Sergey Aleynikov, a former Goldman Sachs computer programmer, stole a portion of Goldman’s proprietary high frequency trading (“HFT”) computer code, apparently in preparation for taking a related, but higher paying, job at a startup company.  A jury convicted him of violating 18 U.S.C. § 2314, which makes it a crime to transport stolen “goods” in interstate commerce, and § 1832, which makes it a crime to steal a trade secret that is related to or included in a “product” that is “produced for or placed in” commerce.  Two months ago, the circuit reversed these convictions in a one-line order with an opinion to follow.

And here it is. While we were all expecting a sufficiency-of-the-evidence opinion, the court instead concluded that the indictment charging Aleynikov with those crimes was itself insufficient because it failed to allege a crime within the terms of the applicable statutes.

First, as to the stolen property count, the court concluded that the stolen HFT code did not constitute “goods,” “wares,” or “merchandise” within the meaning of the statute.  

In 1966, the court had held that stolen photocopies of documents detailing a pharmaceutical manufacturing process were “goods” because the documents were tangible items that were transported across state lines. But that case also suggested that if intellectual property were stolen in an intangible form, the statute would not apply. Moreover, in 1985, the Supreme Court held that the interstate transmission of intangible property – there it was the musical compositions contained in bootleg recordings – did not violate § 2314. Several circuits have subsequently held that intangible property is not a “good” “ware or “merchandise.” 

Aleynikov’s case is no different. He uploaded Goldman’s HFT code to a server in Germany, thereby stealing “purely intangible property embodied in a purely intangible format.”  The indictment did not allege that he “physically seized anything tangible from Goldman,” such as a CD or a flash drive.  And, while he later copied some of the code onto his own laptop and flash drive and transported it interstate, this did not violate the statute either, since the “thing stolen” must be a good or ware “at the time of the theft.”  “The later storage of intangible property on a tangible medium” – just like the bootleg phonograph records in the Supreme Court case – “does not transform the intangible property into a stolen good.”

For the trade secret count, the court concluded that code was not “related to or included in a product that is produced for or placed in” commerce, as required by § 1832.  This language covers two distinct categories of products: those “placed in” commerce are already in the marketplace, while those “produced for” commerce are still in development.  Clearly the source code here was not a product “placed in” commerce. But was also not “produced for” commerce simply because its function was to execute trades in financial markets.  And Godlman had no intention of selling its HFT system or of licensing it to anyone else. Thus, since that code “was not designed to enter or pass in commerce, or to make something that does,” its theft did not violate § 1832. At a minimum, the statute was ambiguous as to whether it would cover stolen HFT code, and under the rule of lenity the outcome would be the same.

In a concurring opinion, Judge Calabresi noted that, while it certainly appeared that Aleynikov’s theft of Goldman’s code was the type of “mischief” that Congress intended to be covered by § 1832, he agreed with the majority’s textual analysis. He suggested that Congress “return to the issue.”

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