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Second Circuit Holds that Goldman Sachs’s Proprietary Source Code Is Intangible Property under the NSPA
By Laura Fishwick – Edited by Lauren Henry

United States v. Aleynikov, No. 11-1126, 2012 WL 1193611 (April 11, 2012).
Slip Opinion

The Second Circuit reversed the holding of the District Court of the Southern District of New York, and found that source code is not a good, ware, or merchandise under the National Stolen Property Act (“NSPA”), a criminal statute that applies to anyone who “transports, transmits, or transfers in interstate or foreign commerce any goods, ware, merchandise, securities or money … knowing the same to be stolen, converted or taken by fraud.” 18 U.S.C. § 2314. The district court had found that because the source code was related to Goldman Sachs’s high-frequency trading (“HFT”) system, and this system contained confidential trade secrets that would be highly valuable to other firms, the source code was a “good” that was “stolen” within the meaning of the NSPA and Aleynikov had violated the statute.

Wired provides an overview of the case. While agreeing with the Second Circuit’s holding, Techdirt admonished the court for incorrectly calling the charges against Aleynikov “theft,” when should be more accurately described as “infringement.”

Goldman Sachs & Co. employed Sergey Aleynikov as a computer programmer to develop source code for its proprietary HFT system, which quickly makes large numbers of trades based on algorithms and data from past trades. Though Goldman’s confidentiality policies forbade Aleynikov from disclosing this sensitive source code, on his last day of work Aleynikov encrypted and uploaded code for a substantial part of the HFT system’s infrastructure and other algorithms to a server in Germany. After he returned home to New Jersey, he downloaded the code to his home computer and copied it to some of his other devices, and he took those devices with him when he later traveled to Illinois. Aleynikov was later arrested by the FBI and indicted for violating the NSPA, among other statutes.

The primary question, the court said, was whether the source code at issue could be considered stolen “goods,” “wares,” or “merchandise” within the meaning of the NSPA. See id. at *4. Delving into the statute’s ordinary meaning, the court found that the common-sense interpretation of “goods” includes as a basic element of a “physical identity between the items unlawfully obtained and those eventually transported.” Id. at *5.

Quoting Dowling v. United States, the court noted that it must interpret statutes narrowly and not go beyond their text because federal crimes are “solely creatures of statute.” The court refused to “stretch or update statutory words of plain and ordinary meaning in order to better accommodate the digital age,” presumably leaving this statute for Congress to update if it chooses. Aleynikov, 2012 WL 1193611, at *6.

The court distinguished Aleynikov from United States v. Bottone, in which the Second Circuit held that photocopied documents of a manufacturing process were tangible goods, and therefore could be “stolen” under the statuteeven though the photocopies themselves were never in the manufacturer’s possession. Id. at *12–13. The court also looked to the Supreme Court case Dowling, in which the Court held that bootlegged musical recordings were not “stolen” “goods” under the NSPA, and found that it confirmed Bottone’s interpretation of the NSPA which had required some tangible property to be taken. Id. at *13.

After reviewing analogous cases in other circuits and concluding that those cases also distinguished between tangible goods and intangible ideas that can be represented physically but whose underlying intellectual property is itself intangible, the court concluded that “Aleynikov stole purely intangible property embodied in a purely intangible format,” which is not prohibited by the NSPA. Id. at *6.

Judge Calabresi joined the majority’s opinion regarding the NSPA, but wrote separately to charge Congress with the task of updating the Economic Espionage Act in order to cover Aleynikov’s conduct.

This opinion follows a line of cases that distinguish between violating intellectual property rights and violating criminal anti-theft statutes. Companies that desire to protect their trade secrets should consider pursuing other avenues such as heightening barriers to infringement and relying on contractual remedies.

Posted On Apr - 19 - 2012 Comments Off

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