Commercial Litigation Alerts

January 27th, 2017

NY Court Expands Protections for Employers to Safeguard Proprietary Information

Yesterday a New York State appeals court reinstated the conviction of a former Goldman Sachs computer programmer under New York's unlawful use of secret scientific material statute. In doing so, the court gave a twenty-first century voice to a statute that was written in the age of blueprints and photocopiers.

People v. Aleynikov: A Brief Overview

Aleynikov was employed by Goldman Sachs as a programmer from 2007-2009. In his role at Goldman, Aleynikov had access to the source code for Goldman's high frequency trading system (software that allowed Goldman to almost instantaneously price and trade securities). In 2009, Aleynikov left Goldman to work for a competitor startup, Teza Technologies. Before he left, however, Aleynikov surreptitiously copied thousands of pieces of Goldman's source code, which he then uploaded to a third-party website and later downloaded to his personal computers.

Aleynikov was first arrested by the FBI in 2009 and charged with violating the National Stolen Property Act and the Economic Espionage Act. Though Aleynikov was convicted at trial, the United States Court of Appeals for the Second Circuit reversed his conviction, holding that his conduct did not violate either statute.

Five months after the Second Circuit's decision, Aleynikov was arrested and charged by the New York County District Attorney's Office for, among other things, unlawful use of secret scientific material [Pen. L. 165.07]. He was again convicted at trial, but before sentencing the trial court threw out the conviction. The trial court held there was no evidence that by copying the source code and uploading it to a third-party website, Aleynikov made a "tangible reproduction or representation" of the source code, which the statute required.

Reversed on Appeal

On appeal, the District Attorney (the "People") argued that Aleynikov made a tangible reproduction of the source code when he uploaded it onto the third-party server. In support of its argument, the People pointed to evidence that the source code physically took up space on the third-party servers and, when it was recovered, law enforcement removed "physical hard drives" from the server. Conversely, Aleynikov argued that because the source code was intangible intellectual property, he could not have made a "tangible reproduction" as the statute required.

The appellate court sided with the People holding that the relevant inquiry was "not whether the source code itself was tangible, but whether defendant made a tangible reproduction of it, which he unquestionably did when he copied it onto the server's physical hard drive where it took up physical space and was physically present." The court also examined the legislative history of the unlawful use of secret scientific material statute, noting that it was originally enacted to address the situation where a person does not commit larceny by "[stealing] the blueprints of a secret process" but still commits a wrong by making and retaining an unauthorized copy of the blueprints. By analogy, the court reasoned that transferring the source code to a server was no different than copying the source code onto a "compact disk or a thumb drive, and [walking] out of Goldman's premises with that device," which would also violate the statute.

Practical Takeaways

In light of Aleynikov, both employees and employers in New York should have a heightened awareness that a departing employee's decision to leave with proprietary information, even in electronic form, can result in a criminal sanction. The case also highlights the importance of having a solid data breach response plan. The facts in Aleynikov largely turned on the information that Goldman provided to the authorities within days after Aleynikov left the company. Without the ability to timely identify and respond to the breach, it would have likely been much more difficult for law enforcement to locate and recover the compromised materials.

If you have questions regarding theft of confidential information please contact Brian Maas at (212) 826 4836 or bmaas@fkks.com, John Harris at (212) 705 4823 or jharris@fkks.com, Caren Decter at (212) 705 4833 or cdecter@fkks.com, or Tyler Maulsby at (212) 705 4893 or tmaulsby@fkks.com, or any member of our Securities Fraud and White Collar Defense group. If you have questions about a data breach or other cybersecurity incident, contact Jeremy Goldman at (310) 579 9611 or jgoldman@fkks.com or any other member of our Privacy and Data Security group.