FEDERAL PROSECUTION OF
VIOLATIONS OF INTELLECTUAL
PROPERTY RIGHTS

(COPYRIGHTS, TRADEMARKS AND TRADE SECRETS)












May 1997

Computer Crime & Intellectual Property Section
Criminal Division
U.S. Department of Justice
Washington, D.C.







Table of Contents



PREFACE



Over the past two decades, systematic infringement of intellectual property rights has become of increasing concern to American businesses, artists and authors. Recently, the problem has been growing much worse. The proliferation of computers and computer networks has made the illegal reproduction and distribution of protected material much easier to accomplish and more difficult to police. The federal law enforcement community has responded to this problem by promoting the enactment of new laws or the reform of existing laws which prohibit trafficking in counterfeit goods (18 U.S.C. § 2320), reproducing or distributing copyrighted works (18 U.S.C. § 2319), and stealing trade secrets (18 U.S.C. §§ 1831 et. seq.). We have also sought to strengthen laws protecting computers and computer information (18 U.S.C. § 1030).

To educate federal prosecutors and agents on intellectual property rights, the General Litigation and Legal Advice Section first published a monograph on criminal copyright prosecutions in 1989. Significant changes in both law and technology have necessitated a new edition of the manual with an expanded focus on trafficking in counterfeit goods and a new section on the theft of trade secrets. We hope that this edition of the manual will be a useful resource -- at least until further changes in law and technology mandate yet another revision. In order for us to stay abreast of the current developments in this rapidly evolving area of the law, we would like to hear about prosecutions involving the criminal intellectual property statutes. Please call us at (202) 514-1026 to report such a prosecution. Finally, please also contact us with any comments, corrections or contributions regarding this manual (1) or for legal advice or litigation assistance.

The manual was written by Stevan D. Mitchell and Peter J.G. Toren with the assistance of David E. Green, under the supervision of Scott Charney, Chief, Computer Crime and Intellectual Property Section, and Martha Stansell-Gamm, Deputy Chief, Computer Crime and Intellectual Property Section.





TABLE OF CONTENTS





INTRODUCTION ...     i



I.     THE PROTECTION OF INTELLECTUAL PROPERTY -- AN OVERVIEW ...     1

A.     INTRODUCTION ...     1

B.     COPYRIGHTS, TRADEMARKS, TRADE SECRETS, AND PATENTS ...     1

1.     Copyrights ...     1
2.     Trademarks ...     2
3.     Trade Secrets ...     2
4.     Patents ...     3



II.     THE PROTECTION OF COPYRIGHTS ...     5

A.     INTELLECTUAL PROPERTY ENTITLED TO COPYRIGHT

PROTECTION ...     5
1.     Historical Grounds for Copyright Protection ...     5
2.     Requirements for Copyright Protection ...     7
    a.     Originality ...     7
    b.     Fixed medium of expression ...     8
    c.     Registration and notice ...     9
3.     Nature of the Rights Protected by Copyrights ...     10
4.     Limitations on Exclusive Rights ...     11
5.     Computer software ...     12



III.     CRIMINAL REMEDIES FOR COPYRIGHT VIOLATIONS ...     17

A.     CRIMINAL COPYRIGHT INFRINGEMENT: 17 U.S.C. § 506(a) AND

18 U.S.C § 2319 ...     17
1.     The Elements of Criminal Copyright Infringement ...     18
    a.     Existence of a valid copyright ...     19
    b.     Infringement ...     19
    c.     Willfulness ...     23
    d.     Commercial advantage or private financial gain ...     24
            (1)     Discrete monetary transactions ...     25
            (2)     Bartering ...     26
    e.     The first sale doctrine in criminal cases ...     27
            (1)     Proving absence of first sale ...     29
2.     Drafting the Indictment ...     31
    a.     10 or More Copies ...     31
    b.     Retail Value ...     33
    c.     Equitable charging considerations ...     33
3.     Other Possible Charges: Money Laundering and RICO ...     35
4.     Juvenile Prosecutions ...     36
5.     Penalties for Criminal Copyright Infringement ...     37
    a.     Statutory penalties ...     37
    b.     Sentencing guidelines ...     37
    c.     Other possible enhancements ...     39

B.     TRAFFICKING IN SOUND RECORDINGS OF LIVE MUSICAL

PERFORMANCES: 18 U.S.C. § 2319A ...     40

C.     OTHER TITLE 17 CRIMINAL PROVISIONS PROTECTING

COPYRIGHTS ...     41
1.     Protection of Copyright Notices, 17 U.S.C. §§ 506(c) and (d) ...     41
2.     False Representations in Copyright Applications, 17 U.S.C. § 506(e) ...     42

D.     OTHER TITLE 18 OFFENSES ...     42

1.     Trafficking in Counterfeit Labels, 18 U.S.C. § 2318 ...     42
2.     Interstate Transportation of Stolen Property, 18 U.S.C. § 2314 ...     44
3.     Mail and Wire Fraud, 18 U.S.C. §§ 1341 and 1343 ...     45
4.     Smuggling, 18 U.S.C. § 545 ...     47

E.     STATUTE OF LIMITATIONS ...     47

F.     FORFEITURE ...     47

1.     Criminal Forfeiture ...     48
2.     Civil Forfeiture ...     48

G.     REPORTING REQUIREMENTS ...     49

H.     ALTERNATIVE STATE REMEDIES ...     50



IV.     PROTECTION OF TRADEMARKS ...     51

A.     INTELLECTUAL PROPERTY ENTITLED TO TRADEMARK

PROTECTION ...     51
1.     Constitutional Limits on Trademark Protection ...     51
2.     Nature of the Rights Protected by Trademarks ...     52
3.     Statutory Limits on Trademark Protection ...     52
    a.     Distinctiveness ...     53
    b.     Use in commerce ...     54
4.     Limitations on Exclusive Rights ...     55

B.     THE CRIMINAL LAW ...     55

1.     Overview of Statute ...     55
2.     Elements ...     56
    a.     Trafficking in goods or services ...     56
    b.     Trafficking was intentional ...     56
    c.     The defendant used a "counterfeit mark" ...     57
    d.     The defendant knew that the mark was counterfeit ...     58
3.     Defenses ...     59
    a.     Lanham Act defenses ...     59
    b.     Overrun or "grey market goods" ...     59
4.     Charging Decisions ...     60
    a.     Intent of statute ...     60
    b.     Money laundering/RICO ...     61
    c.     Equitable charging considerations ...     61
            (1)     Extent of civil recovery ...     62
            (2)     Violation of existing civil order--contempt ...     62
    d.     Monetary damages ...     62
    e.     Units of prosecution ...     63
    f.     Juvenile prosecutions ...     63

C.     PENALTIES ...     64

1.     Statutory ...     64
2.     Sentencing Guidelines ...     64
3.     Forfeiture ...     66
    a.     Criminal ...     66
    b.     Civil ...     66

D.     CONTRASTING THE TRADEMARK AND THE COPYRIGHT ACT ...     67

E.     CHARGING BOTH CRIMINAL COPYRIGHT AND TRADEMARK

VIOLATIONS ...     68



V.     PROSECUTION OF THEFT OF TRADE SECRETS ...     70

A.     INTRODUCTION ...     70

B.     THE ECONOMIC ESPIONAGE ACT OF 1996 ...     71

1.     Overview of the Statute ...     71
2.     Elements common to §§ 1831 and 1832 ...     72
    a.     Misappropriation ...     73
    b.     Knowledge ...     73
    c.     Trade secret ...     74
3.     Additional § 1831 Element ...     77
    a.     Intent to benefit a foreign government ...     77
4.     Additional section 1832 elements ...     79
    a.     Economic benefit to a third party ...     79
    b.     Intent to injure the owner of the trade secret ...     79
    c.     Interstate or foreign commerce ...     79
5.     Defenses ...     80
    a.     Parallel development ...     80
    b.     Reverse engineering ...     80
    c.     General knowledge ...     81
    d.     The First Amendment ...     82
6.     Criminal Forfeiture ...     82
7.     Civil Proceedings ...     83
8.     Confidentiality ...     83
9.     Extraterritoriality ...     84
10.     Statutory Penalties ...     84
11.     Department of Justice Oversight ...     85

C.     OTHER POSSIBLE CHARGES ...     85

1.     Introduction ...     85
2.     18 U.S.C. § 2314 ...     86
    a.     Elements ...     86
            (1)     Transportation in interstate commerce ...     87
            (2)     Goods, wares and merchandise ...     87
            (3)     Goods must have a value of $5,000 or more ...     89
            (4)     Stolen, converted or taken by fraud ...     90
    b.     Venue ...     90
3.     18 U.S.C. § 2315 ...     91
4.     18 U.S.C. §§ 1341 and 1343 ...     91
5.     18 U.S.C. § 1905 ...     93
6.     18 U.S.C. § 1030 ...     94
7.     State Law ...     94



VI.     APPENDICES ...     A-1
Appendix A:     List of Contact Persons ...     A-1
Appendix B:     Sample Indictment - 18 U.S.C. § 2319 (Misdemeanor) ...     B-1
Appendix C:     Sample Indictment - 18 U.S.C. § 2319 (Felony) ...     C-1
Appendix D:     Sample Indictment - 18 U.S.C. § 2320 ...     D-1
Appendix E:     Sample Indictment - 18 U.S.C. § 1831 ...     E-1
Appendix F:     Sample Indictment - 18 U.S.C. § 1832 ...     F-1
Appendix G:     Search Warrant Affidavit (Electronic Environment) ...     G-1
Appendix H:     Sample Language for Jury Instructions - 18 U.S.C. § 2319 ...     H-1
Appendix I:     Sample Language for Jury Instructions - 18 U.S.C. § 2320 ...     I-1
Appendix J:     Sample Language for Jury Instructions - 18 U.S.C. § 1831 ...     J-1
Appendix K:     Sample Language for Jury Instructions - 18 U.S.C. § 1832 ...     K-1
Appendix L:     List of States with "True Name and Address" Satutes ...     L-1
Appendix M:     State Criminal Trade Secret Statutes ...     M-1
Appendix N:     Legislative History - Copyright Felony Act ...     N-1
Appendix O:     Legislative History - Economic Espionage Act of 1996 ...     O-1
Appendix P:     Table of Authorities ...     P-1



Table of Contents



INTRODUCTION





The emergence of a truly global marketplace has created an increased demand for U.S. brand-named consumer goods and, unfortunately, a concomitant rise in illegal copying and reproduction of these goods. The illicit trade in counterfeit records, films, audio and videotapes, compact disks, computer programs and other goods has also been greatly facilitated by the ease with which such goods can be reproduced and distributed. American companies and businesses are losing vast sums of money as a result of this bootlegging, piracy, and counterfeiting. (2) In addition, in the most extreme cases, lives are being jeopardized through the unwitting use of inferior counterfeit products.

Information, itself, has also become increasingly valuable. With the end of the cold war, the focus of foreign espionage is no longer directed solely towards obtaining American military secrets, but to obtaining valuable proprietary information from U.S. companies. This theft of trade secrets has also been facilitated by emerging technology.

Investigations by federal law enforcement agencies must become more sophisticated. In the past, criminal investigations regarding intellectual property rights mainly targeted readily identifiable commercial operations. Law enforcement agents would purchase pirated material and then obtain search warrants for additional pirated or counterfeit materials available for sale to the public. Due to developing technology, however, this contraband can now be transferred electronically in a number of ways. Pirated computer programs, for example, can be copied and transferred over the Internet to hundreds of individuals in seconds, often making these electronic transfers difficult to detect and prosecute.

Similarly, a person stealing trade secrets no longer has to physically copy documents because much scientific and technical information is now stored on computers. Instead of copying hundreds of pages of information on a duplicating machine, a person can download that material onto a single computer disk,(3) which can be easily concealed in a pocket. The information on the disk can then be sent or transmitted anywhere in the world without ever engendering the employer's suspicions. Additionally, if a thief is able to illegally penetrate a company's computer system, he or she can download that company's trade secrets and transmit them on international computer networks without removing the originals from the victim company.

By enacting felony provisions for, among other things, unauthorized reproduction or distribution of copyrighted works, trafficking in counterfeit trademarked goods, and theft of trade secrets, Congress has clearly evinced an intent to treat the misuse of intellectual property as a serious matter. This manual begins with an overview of the protection of intellectual property, and discusses the basic scope of copyright, trademark, trade secret, and patent law. It then focuses on criminal copyright infringement, describing specific statutes and demonstrating their application in criminal copyright prosecutions. Additional sections of the manual then address federal laws which prohibit trafficking in counterfeit goods. The last section discusses the prosecution of trade secret thefts and analyzes the Economic Espionage Act of 1996. Note all prosecutions under this Act must first be approved by the Attorney General, the Deputy Attorney General, or the Assistant Attorney General of the Criminal Division. Finally, attached as appendices are a list of contact persons, model indictments, search warrant affidavits, jury instructions, a list of state criminal trade secret statutes, and the legislative histories of the Copyright Felony Act and the Economic Espionage Act of 1996.



Table of Contents



I.     THE PROTECTION OF INTELLECTUAL PROPERTY -- AN OVERVIEW



A.     INTRODUCTION



The importance of the protection of intellectual property to the economic well-being and security of the United States cannot be overestimated. As one court put it, "[t]he future of the nation depends in no small part on the efficiency of industry, and the efficiency of industry depends in no small part on the protection of intellectual property." Rockwell Graphic Systems, Inc. v. DEV Indus., Inc., 925 F.2d 174, 180 (7th Cir. 1991).

In many cases, civil remedies, including statutory damages, are adequate to compensate victims in copyright, trademark, trade secret, and patent cases. However, in an increasing number of cases, federal criminal prosecutions are warranted against flagrant infringers who might otherwise continue to flourish despite civil actions against them. These criminal investigations may also uncover evidence of related crimes, such as the unlawful importation of counterfeit goods. Additionally, since the theft of American trade secrets by foreign countries and companies is on a steep rise, only the federal government has the resources and reach to investigate and prosecute as needed. Further, federal criminal prosecutions often deter similar crimes throughout and across affected industries, and send a clear message to our international counterparts that protecting Intellectual Property Rights ("IPR") is a major concern of the United States.

Table of Contents



B.     COPYRIGHTS, TRADEMARKS, TRADE SECRETS, AND PATENTS



The protection of intellectual property can be divided into four general categories: (1) copyrights; (2) trademarks; (3) trade secrets; and (4) patents. Unlike the first three categories, patent infringement carries only civil remedies. Thus, this manual addresses violations in the first three areas. As an initial matter though, it is important to understand the basic scope each of these four areas of intellectual property.



Table of Contents

1.     Copyrights




The law of copyright, in general, protects "original works of authorship" including the following broad categories: literary works, musical works, dramatic works, pantomimes, pictorial, graphic, sculptural works, motion pictures, sound recordings, and architectural works. 17 U.S.C. § 102(a). It protects only a work's expression, not its underlying ideas; for example, one cannot copyright a machine process for manufacturing shoes. Copyright protection attaches when the work is "fixed in a tangible medium of expression." (4) Once in place, it extends to the embodiment of the work itself, protecting against unlicensed reproduction, distribution, display, performance, or modification of the copyrighted work. See 17 U.S.C. § 106. Remedies for infringement may include injunctive relief; monetary relief in the form of damages (lost profits), profits (gained by defendant in excess of lost profits) or statutory damages; impoundment and destruction of infringing material; criminal penalties; and attorney's fees and costs.



Table of Contents

2.     Trademarks




If copyright is the law of authorship, trademark is the law of consumer marketing and advertising. Trademarks are given federal protection by the Lanham Act. 15 U.S.C. § 1051 et seq. The Lanham Act, in general, prohibits the imitation and unauthorized use of a trademark which is defined as "any word, name, symbol or device or any combination [used by a person] to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown." 15 U.S.C. § 1127. If the trademark is used to identify the source of the goods as well as the goods themselves, it is known more specifically as a service mark. The purpose of a trademark is to signify a single source of product and a certain level of quality to all consumers. Thus, trademarks, unlike other forms of intellectual property, are always connected to some commercial activity or item and have no function or independent existence apart from such goods or services. To be granted trademark protection, an applicant must demonstrate that the mark is actually used, and has been continuously used, in commerce. Remedies for infringement may include injunctive relief; monetary relief in the form of damages (lost profits), profits (gained by defendant in excess of lost profits) or statutory damages (trebled when appropriate); seizure and destruction of infringing material; criminal penalties; and attorney's fees and costs.



Table of Contents

3.     Trade Secrets




In general, a trade secret is any formula, pattern, device or compilation of information used in a business to obtain an advantage over competitors who do not know or use it. Perhaps the most famous trade secret is the formula for manufacturing Coca-Cola. Coca-Cola was accorded trade secret protection in 1920 because the recipe had been continuously maintained as a trade secret since the company's founding in 1892, and it exists to this day. See Coca-Cola Bottling Co. v. Coca-Cola Co., 269 F. 796, 799 (3d Cir. 1920).

Until recently, with one very minor exception, (5) there was no specific federal law which criminalized the theft of trade secrets. Federal prosecutors were limited to using other laws, such as the Interstate Transportation of Stolen Property Act, 18 U.S.C. §§ 2314 and 2315, and the Mail and Wire Fraud statutes, 18 U.S.C. §§ 1341 and 1343, to prosecute individuals for the theft of trade secrets. However, in recognition of this enforcement gap and of the increasing importance of intellectual property to the economic well-being of the United States, Congress enacted The Economic Espionage Act of 1996 effective October 11, 1996. This Act creates two separate provisions which criminalize the theft of trade secrets. The first provision penalizes the theft of trade secrets when the theft is done to benefit a foreign government, instrumentality or agent. (6) 18 U.S.C. § 1831. In contrast, the second provision makes criminal the more common commercial theft of trade secrets, regardless of who benefits. The Act also provides for criminal forfeiture and permits the use of civil proceedings by the United States to enjoin violations. Finally, it seeks to protect the confidentiality of trade secrets during litigation and provides for extraterritorial jurisdiction when the thief is an American citizen or a permanent resident of the United States. 18 U.S.C. §§ 1833-1837.



Table of Contents

4.     Patents




If copyright is the law of authorship and trademarks is the law of marketing, patents is the law of invention. A patent can be obtained for "any new and useful process, machine, manufacture, or composition of matter, or any new or useful improvement thereof . . . ." 35 U.S.C. § 101. A patent gives the patentee the right to exclude others from making, using, and selling devices that embody the claimed invention. (7) See 35 U.S.C. § 271(a). In order to be awarded a patent by the Patent and Trademark Office, the subject matter must be both novel and a step beyond the prior art which, together, is known as "non-obviousness." See 35 U.S.C. § 103.

Patents protect products and processes, not pure ideas. For example, Albert Einstein could not have received a patent for his novel ideas on the theory of relativity. However, methods for using this theory in a nuclear power plant are patentable. Unlike copyrights, patent rights do not vest until the patent is granted although, pending approval, the substance of many patent applications may be protected under trade secret laws. Since June 8, 1995, upon grant, patents last for a maximum of 14 or 20 years from filing depending on whether it is a design or a functional patent. Remedies for patent infringement include injunctive relief, damages (which may be trebled for willful violations), attorney's fees in exceptional cases, and costs.

There are no federal laws that criminalize patent infringement. (8) This perhaps reflects the difficulty of proving that a person infringed a patent with the requisite mens rea for a criminal violation, given the possibility of independent creation and the arcane nature of the patent approval process conducted by the United States Patent Office. Kent Walker, Federal Criminal Remedies for the Theft of Intellectual Property, 16 Hastings Comm/Ent. L.J., 681, 686-87 (1994).
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----- footnotes ------

1. This text is not intended to create or confer any rights, privileges or benefits to prospective or actual witnesses or defendants. It is also not intended to have the force of law or of a United States Department of Justice directive. See United States v. Caceres, 440 U.S. 741 (1979).

2.     The terms "bootlegging," "piracy," and "counterfeiting" are similar but not synonymous. "Bootlegging" generally refers to the unauthorized recording and distribution of musical performances. "Piracy" involves the unauthorized reproduction of an existing copyrighted work or distribution of an infringing copy. However, the original packaging or graphics of the genuine merchandise are not copied. "Counterfeiting," by contrast, occurs when an infringer not only reproduces and distributes infringing merchandise, but also copies the genuine packaging of the product. In such cases, the counterfeiter is attempting to pass off his or her products as legitimate goods produced by the original manufacturer.

3.     A 3.5 inch high-density computer disk can store approximately 720 pages of text.

4.     "A work is 'fixed' in a tangible medium of expression when its embodiment in a copy or phonorecord, by or under the authority of the author, is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration." 17 U.S.C. § 101.

5.     18 U.S.C. § 1905 provides, inter alia, misdemeanor sanctions for the unauthorized disclosure of government information, including trade secrets, by a government employee.

6.     In general, the test of whether a foreign company can be prosecuted under 18 U.S.C.§ 1831 is whether "the activities of the company are from a practical and substantive standpoint, foreign government directed." 142 Cong. Rec. S12201, S12201 (daily ed. Oct. 2, 1996). Of course, if this requirement cannot be met, the foreign company can still be prosecuted under 18 U.S.C. § 1832.

7.     The popular notion that a patent grants the patentee the exclusive right to make, use, and sell his invention is erroneous. A patent gives you the right to exclude others from making, using or selling your invention. For example, if a chair with a seat and four legs is patented by inventor A, inventor B may obtain a patent for a chair with a seat, four legs and an armrest, but this patent does not allow him to make, use, or sell his chair because that would infringe A's patent for a chair with four legs and a seat.

8.     As of this writing, Congress has not provided criminal penalties for reproduction or distribution of goods that infringe patents. Congress has relied instead on affording plaintiffs a civil cause of action that makes treble damages and attorney's fees available for willful infringement. See 35 U.S.C. §§ 281-294. The only federal criminal statute currently dealing with patents makes it a felony to make, forge, counterfeit, or otherwise alter letters patent, or to pass or publish same knowing them to have been forged. 18 U.S.C. § 497.

Trade secret laws might be available in cases that otherwise closely resemble the misappropriation or wrongful use of patented concepts. It may take years, for example, for a patent application to be fully processed and for a patent to issue. In the intervening years, the information contained in a patent application may be entitled to trade secret protection under state laws or under the recently enacted Economic Espionage Act of 1996.