[House Report 112-610]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 112-610
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FOREIGN AND ECONOMIC ESPIONAGE PENALTY ENHANCEMENT ACT OF 2012
_______
July 19, 2012.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Smith of Texas, from the Committee on the Judiciary, submitted the
following
R E P O R T
[To accompany H.R. 6029]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the
bill (H.R. 6029) to amend title 18, United States Code, to
provide for increased penalties for foreign and economic
espionage, and for other purposes, having considered the same,
report favorably thereon without amendment and recommend that
the bill do pass.
CONTENTS
Page
Purpose and Summary.............................................. 1
Background and Need for the Legislation.......................... 2
Hearings......................................................... 6
Committee Consideration.......................................... 6
Committee Votes.................................................. 6
Committee Oversight Findings..................................... 6
New Budget Authority and Tax Expenditures........................ 6
Congressional Budget Office Cost Estimate........................ 6
Performance Goals and Objectives................................. 8
Advisory on Earmarks............................................. 8
Section-by-Section Analysis...................................... 8
Changes in Existing Law Made by the Bill, as Reported............ 8
Purpose and Summary
H.R. 6029, the Foreign and Economic Espionage Penalty
Enhancement Act of 2012, amends the Federal criminal code to
combat the significant and growing threat presented by
criminals who engage in espionage on behalf of foreign
adversaries and competitors. The bill amends Sec. 1831(a) of
title 18, United States Code, to increase the maximum penalties
for the theft of trade secrets by criminals who knowingly
commit economic espionage to benefit a foreign entity. By
strengthening penalties and enhancing criminal deterrence, the
bill protects U.S. jobs and technologies while promoting
investments and innovation. When enacted, H.R. 6029 will
advance the economic and national security interests of the
United States.
Background and Need for the Legislation
Foreign Economic Espionage a Persistent Threat to U.S. Businesses:
In October 2011, the National Counterintelligence Executive
(ONCIX) published its biennial report to Congress on Foreign
Economic Collection and Industrial Espionage. The report
concluded, ``Foreign economic collection and industrial
espionage against the United States represent significant and
growing threats to the nation's prosperity and security,''\1\
and provided further:
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\1\Foreign Spies Stealing US Economic Secrets in Cyberspace, Report
to Congress on Foreign Economic Collection and Industrial Espionage,
2009-2011, Office of the National Counterintelligence Executive, p. i,
(October 2011).
Sensitive US economic information and technology are
targeted by the intelligence services, private sector
companies, academic and research institutions, and
citizens of dozens of countries.\2\
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\2\Id.
Of particular concern, the report identified two
``Intelligence Adversaries,''\3\ noting that, ``China and
Russia view themselves as strategic competitors of the United
States and are the most aggressive collectors of US economic
information and technology.''\4\ The report warned:
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\3\Id. at p. 4
\4\Id.
We judge that the governments of China and Russia will
remain aggressive and capable collectors of sensitive
US economic information and technologies, particularly
in cyberspace.\5\
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\5\Id. at p. ii.
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And the Intelligence Community predicted:
Because the United States is a leader in the
development of new technologies and a central player in
global financial and trade networks, foreign attempts
to collect US technological and economic information
will continue at a high level and will represent a
growing and persistent threat to US economic
security.\6\
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\6\Id. at p. i.
In January 2012, the Director of National Intelligence
(DNI), James R. Clapper, echoed the ONCIX report's warnings
when he delivered the Worldwide Threat Assessment of the US
Intelligence Community. Addressing counterintelligence threats,
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General Clapper testified:
We assess that foreign intelligence services (FIS) are
constantly developing methods and technologies that
challenge the ability of the US Government and private
sector to protect US national security and economic
information, information systems, and
infrastructure.\7\
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\7\Unclassified Statement for the Record on the Worldwide Threat
Assessment of the US Intelligence Community for the Senate Select
Committee on Intelligence, James R. Clapper, Director of National
Intelligence, p. 8, January 31, 2012.
And stated, ``the most menacing foreign intelligence
threats in the next two to 3 years will involve'' the need to
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confront and counter three activities:
1) cyber-enabled espionage;
2) insider threats; and
3) espionage by China, Russia and Iran.\8\
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\8\Id.
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Elaborating on the last point, the DNI stated:
Russia and China are aggressive and successful
purveyors of economic espionage against the United
States. . . . We assess that FIS from these three
countries [including Iran] will remain the top threats
to the United States in the coming years.\9\
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\9\Id.
In explaining the threat posed by cyber intrusions, the DNI
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referred to the ONCIX report, when he testified:
Among state actors, China and Russia are of particular
concern . . . entities within these countries are
responsible for extensive illicit intrusions into US
computer networks and theft of US intellectual
property.\10\
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\10\Id. at p. 7
Existing U.S. Legal Protections and Authority:
In the United States, trade secret\11\ law protects secret,
valuable business information from misappropriation by
others.\12\
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\11\``A trade secret is really just a piece of information (such as
a customer list, or a method of production, or a secret formula for a
soft drink) that the holder tries to keep secret by executing
confidentiality agreements with employees and others and by hiding the
information from outsiders by means of fences, safes, encryption, and
other means of concealment, so that the only way the secret can be
unmasked is by a breach of contract or tort.'' Confold Pac v.Polaris
Indus., 433 F.3d 952, 959 (7th Cir. 2006). The statutory definition of
a trade secret is codified at 18 USC Sec. 1839(3).
\12\Intellectual Property: The Law of Copyrights, Patents and
Trademarks, Roger E. Schechter and John R. Thomas, p. 528, (2003).
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To promote legitimate competition and protect the
investments and trade secrets of U.S. companies, Congress
enacted the Economic Espionage Act of 1996 (EEA)\13\ to provide
criminal penalties for the theft of commercial trade secrets.
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\13\The EEA is codified at 18 USCSec. Sec. 1831-1839.
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The EEA addresses two types of trade secret
misappropriation. Section 1831 provides penalties for the theft
of a trade secret to benefit a foreign government,
instrumentality or agent while section 1832 provides penalties
for the commercial theft of a trade secret carried out for
economic advantage, whether or not the theft is intended to
benefit a foreign entity.
Reflecting the more serious nature of economic espionage
committed in furtherance of a foreign interest, the maximum
sentence for an individual convicted is 15 years' imprisonment
or a fine of $500,000, or both. In contrast, the maximum
sentence for an individual convicted of the theft of a trade
secret under Sec. 1832 is 10 years' imprisonment or a fine of
$250,000, or both. An organization convicted of a violation of
Sec. 1831 may be fined up to $10 million while an organization
convicted of a violation of Sec. 1832 is eligible for a fine of
up to $5 million.
Since Congress enacted the EEA nearly two decades ago, it
has not updated the penalty structure to reflect the increasing
importance and value of intellectual property to our collective
economy or its unique role as a catalyst to the continued
growth and success of individual enterprises.
Foreign Economic Espionage Imposes Enormous Costs on U.S. Businesses,
Compromises Critical Technologies and Undermines U.S. Security
and Competitiveness:
Today, U.S businesses are built on the foundation of
intangible assets. These include trade secrets, proprietary
data, marketing plans, business processes and source code. An
estimated 81% of the market value of S&P 500 companies in 2009
was derived from the value of their intangible portfolios.\14\
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\14\Underground Economies: Intellectual Capital and Sensitive
Corporate Data Now the Latest Cybercrime Currency, p. 6, March 28,
2011, available at http://www.mcafee.com/us/resources/
reports/rp-underground-economies.pdf
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On average, US organizations spend an estimated $1 million
a day on information technology.\15\ Despite this investment,
U.S. businesses are increasingly targeted for and vulnerable to
the theft of their intellectual capital. In many cases,
businesses aren't aware of advanced persistent threats that
target their valuable trade secrets. Even when detected,
businesses may not discover thefts until well after they've
incurred serious damage.
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\15\Id. at p. 1
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In May 2012, the Federal Bureau of Investigation (FBI)
reported U.S. companies lost more than $13 billion to trade
secret theft in cases opened in a brief period--just over 6
months during the current fiscal year.\16\
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\16\FBI's New Campaign Targets Corporate Espionage, article by Evan
Perez, May 11, 2012, The Wall Street Journal, available at http://
online.wsj.com/article/SB100014240527023045439
04577396520137905092.html.
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Writing in the Washington Post in November 2011, Ellen
Nakashima summarized U.S. official's estimates of losses to
specific U.S. companies:
The head of the military's U.S. Cyber Command, Gen.
Keith Alexander, said one U.S. company recently lost $1
billion worth of intellectual property over the course
of a few days. \17\
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\17\In A World of Cybertheft, U.S. Names China, Russia As Main
Culprits, article by Ellen Nakashima, November 3, 2011, The Washington
Post, available at http://www.
washingtonpost.com/world/national-security/us-cyber-espionage-report-
names-china-and-russia-as-main-culprits/2011/11/02/
gIQAF5fRiM_story.html
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Continuing, the report stated:
A senior intelligence official, briefing reporters on
the condition of anonymity, noted a few cases in which
estimates were given in economic espionage prosecutions
over the past 6 years: $100 million worth of
insecticide research from Dow Chemical, $400 million
worth of chemical formulas from DuPont, $600 million
worth of proprietary data from Motorola, $20 million
worth of paint formulas from Valspar.\18\
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\18\Id.
Private sector experts validate that extensive damages and
losses are being sustained by U.S. and global enterprises. A
2009 report from McAfee, the world's largest dedicated security
technology company, found ``companies worldwide lost more than
an estimated $1 trillion in 2008 due to data leaks, the cost of
remediation and reputational damage.''\19\
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\19\Ibid. 14, at 5
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A 2011 report from McAfee and Science Applications
International Corporation (SAIC), a leading scientific,
engineering and technology applications company, concluded,
``[t]he cyber underground economy has shifted its focus to the
theft of corporate intellectual capital--the new currency of
cybercrime''\20\, and ``[t]he target and motivation are almost
always financial.''\21\
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\20\Id. at 3
\21\Id. at 5
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The value of losses is difficult to establish with absolute
certainty but the Intelligence Community has offered a proxy
for ``the cost of developing new ideas, and . . . an indicator
or the value of the information that is most vulnerable to
economic espionage''--corporate and government spending on
research and development (R&D).\22\ In 2008, the most recent
year available, the National Science Foundation ``calculated
that US industry, the Federal Government, universities, and
other nonprofit organizations expended $398 billion on R&D, or
2.8% of the US Gross Domestic Product.''\23\
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\22\Ibid. 1, at 4
\23\Id.
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The McAfee/SAIC analysis framed the cost/benefit analysis
for potential criminals in a succinct manner: ``What is a few
million dollars [expended to steal intellectual capital] if a
competitor company can save billions in research and
development by stealing . . . proprietary data?''\24\
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\24\Ibid. 14, at p. 6
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Responding to accelerating losses to American businesses
and increasing threats to U.S. national and economic security,
U.S. law enforcement are stepping up the investigation and
prosecution of trade secret theft and economic espionage cases.
In 2010, the FBI and the Department of Justice opened 66 such
investigations.\25\ Of seven insider EEA cases prosecuted in
2010, six involved links to a single country--China.\26\ In
April 2012, Dan Freedman of the Houston Chronicle reported that
since 2010, ``prosecutors brought at least 30 China-related
cases involving economic espionage or violations of the law
barring unlicensed export of militarily sensitive
technology.''\27\
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\25\Department of Justice Joins in Launch of Administration's
Strategic Plan on Intellectual Property Enforcement as Part of Ongoing
IP Initiative, Dept. of Justice (June 22, 2010), available at http://
www.justice.gov/opa/pr/2010/June/10-ag-722.html.
\26\Ibid. 17
\27\Costs of Economic Espionage Mount, article by Dan Freedman,
April 27, 2012, Houston Chronicle, available at http://www.chron.com/
news/houston-texas/article/Costs-of-economic-espionage-mount-
3517271.php
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The U.S. Intellectual Property Enforcement Coordinator
recently recommended that Congress increase both the statutory
maximum penalty for economic espionage cases and the U.S.
Sentencing Guideline range for the theft of trade secrets and
economic espionage, including trade secrets transferred or
attempted to be transferred outside the U.S., in recognition of
the ``severity of the conduct inherent in the offense.''\28\
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\28\Administration's White Paper on Intellectual Property
Enforcement Legislative Recommendations, p. 4, (March 2011). Available
at http://www.whitehouse.gov/sites/default/files/ip_
white_paper.pdf
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Representative Lamar Smith, the Chairman of the Judiciary
Committee, and 11 bipartisan members of the House introduced
H.R. 6029, the ``Foreign and Economic Espionage Penalty
Enhancement Act of 2012,'' on June 27, 2012. A targeted
measure, H.R. 6029 increases the maximum penalties for those
convicted of foreign economic espionage. The bill responds to
the significant and persistent threat of foreign economic
espionage by deterring criminal activity and increasing the
``costs of doing business'' for those who engage in criminal
activity that harms the economic and national security
interests of the United States.
Hearings
The Committee on the Judiciary held no hearings on H.R.
6029.
Committee Consideration
On July 10, 2012, the Committee met in open session and
ordered the bill, H.R. 6029, favorably reported without
amendment, by voice vote, a quorum being present.
Committee Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises that there
were no recorded votes during the Committee's consideration of
H.R. 6029.
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority or increased tax
expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 6029, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, July 17, 2012.
Hon. Lamar Smith, Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6029, the
``Foreign and Economic Espionage Penalty Enhancement Act of
2012.''
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Mark
Grabowicz, who can be reached at 226-2860.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure
cc:
Honorable John Conyers, Jr.
Ranking Member
H.R. 6029--Foreign and Economic Espionage Penalty Enhancement Act of
2012.
As ordered reported by the House Committee on the Judiciary
on July 10, 2012.
H.R. 6029 would increase the maximum penalties, including
fines, for revealing trade secrets to foreign entities and
would direct the United States Sentencing Commission (USSC) to
review and, if necessary, amend sentencing guidelines for
economic espionage. Based on information provided by the USSC,
CBO estimates that implementing H.R. 6029 would have no
significant impact on the Federal budget. Enacting H.R. 6029
could affect direct spending and revenues; therefore, pay-as-
you-go procedures apply. However, CBO estimates that the net
effects would be insignificant for each year.
Because those prosecuted and convicted under H.R. 6029
could be subject to criminal fines, the Federal Government
might collect additional fines if the legislation is enacted.
Criminal fines are recorded as revenues, deposited in the Crime
Victims Fund, and later spent. CBO expects that any additional
revenues and direct spending would not be significant because
of the small number of cases likely affected.
H.R. 6029 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of State, local, or tribal
governments.
On January 24, 2012, CBO transmitted a cost estimate for S.
678, the ``Economic Espionage Penalty Enhancement Act,'' as
reported by the Senate Committee on the Judiciary on December
8, 2011. The two bills are similar, and the CBO cost estimates
are the same.
The CBO staff contact for this estimate is Mark Grabowicz.
The estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Performance Goals and Objectives
The Committee states that pursuant to clause 3(c)(4) of
rule XIII of the Rules of the House of Representatives, H.R.
6029, the Foreign and Economic Espionage Penalty Enhancement
Act of 2012, will improve the U.S. Government's ability to
deter acts of foreign espionage and provide a more appropriate
range of penalties for those convicted of the theft of trade
secrets from U.S. companies.
Advisory on Earmarks
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 6029 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as defined in clause 9(e), 9(f), or 9(g) of Rule XXI.
Section-by-Section Analysis
The following discussion describes the bill as reported by
the Committee.
Sec. 1. Short title. Section 1 sets forth the short title
of the bill as the ``Foreign and Economic Espionage Penalty
Enhancement Act of 2012.''
Sec. 2. Protecting U.S. Businesses from Foreign Espionage.
Section 2 increases the maximum penalty for an individual
convicted of foreign espionage to 20 years, a fine of up to $5
million, or both and provides the maximum penalty for an
organization convicted of foreign espionage shall be up to $10
million or three times the value of the stolen trade secret.
Sec. 3. Review by the U.S. Sentencing Commission. Provides
that the U.S. Sentencing Commission shall review the Federal
sentencing guidelines and policy statements that apply to
persons convicted of trade secret offenses to ensure they
appropriately reflect the seriousness of the offenses, account
for their actual and potential harm and provide adequate
deterrence.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, existing law in which no change
is proposed is shown in roman):
TITLE 18, UNITED STATES CODE
* * * * * * *
PART I--CRIMES
* * * * * * *
CHAPTER 90--PROTECTION OF TRADE SECRETS
* * * * * * *
Sec. 1831. Economic espionage
(a) In General.--Whoever, intending or knowing that the
offense will benefit any foreign government, foreign
instrumentality, or foreign agent, knowingly--
(1) * * *
* * * * * * *
shall, except as provided in subsection (b), be fined [not more
than $500,000] not more than $5,000,000 or imprisoned not more
than [15 years] 20 years, or both.
(b) Organizations.--Any organization that commits any
offense described in subsection (a) shall be fined [not more
than $10,000,000] not more than the greater of $10,000,000 or 3
times the value of the stolen trade secret to the organization,
including expenses for research and design and other costs of
reproducing the trade secret that the organization has thereby
avoided.
* * * * * * *