By Josh Rich --
As the saying goes, hard cases make bad law. And it certainly looked improper when Sergey Aleynikov downloaded high-frequency trading ("HFT") source code as he was leaving his job as a Goldman Sachs programmer, at least to the juries who convicted him of Federal and New York state crimes. But while the U.S. Court of Appeals for the Second Circuit overturned his conviction because the law did not fit the offense, the New York Court of Appeals (the highest court in the state) recently upheld his conviction on "Unlawful Use of Secret Scientific Material." To reach that conclusion, however, the Court of Appeals had to construe two statutory provisions in ways that may have unintended -- and unwanted -- consequences for New York's criminal laws.
To recap, Mr. Aleynikov left Goldman Sachs on June 5, 2009 to take a job with another trading firm where he would be writing HFT software.[1] Before he left, first on June 1 then again on June 5 (his last day as an employee), he downloaded portions of the Goldman Sachs HFT software source code and uploaded them to a server in Germany. He later downloaded the source code to his personal computer and allegedly used it to structure HFT code modules for his new employer.
After discovering Mr. Aleynikov's actions, Goldman Sachs notified the FBI, who questioned Mr. Aleynikov about Goldman Sachs's allegations. Mr. Aleynikov cooperated with the interrogation, admitting that he had downloaded the source code, but explaining that he had innocent motives. The FBI and the U.S. Attorney did not see his actions as innocent; he was prosecuted in the Southern District of New York for violations of the Economic Espionage Act and National Stolen Property Act and found guilty under both laws.[2] Upon appeal, however, the Second Circuit reversed his conviction on both counts. Importantly, in doing so, it found that source code was "intangible property" and therefore not a "good" under the National Stolen Property Act.[3]
Although the Second Circuit overturned Mr. Aleynikov's conviction, the FBI turned Mr. Aleynikov's computer, passport, and other materials over to the Manhattan District Attorney's Office rather than returning them to him. The Manhattan D.A. then charged Mr. Aleynikov with two counts of Unlawful Use of Secret Scientific Material (each count tied to one of the two downloading sessions) and one count of Unlawful Duplication of Computer Related Material. At trial, the jury convicted Mr. Aleynikov on the count of unlawful use related to his June 5 downloads, hung on the count of unlawful use related to his June 1 downloads, and acquitted him of unlawful duplication. But the trial court (known in New York as the Supreme Court) overturned the jury conviction, reasoning (among other things) that Mr. Aleynikov had not made a "tangible reproduction or representation" of the Goldman HFT source code and that the prosecution had not shown that he had intended to "appropriate" the use of the code, both of which were statutory requirements for the unlawful use offense.[4]
The appellate court (the Appellate Division of the Supreme Court) reversed the trial court order, reinstating the jury conviction on the unlawful use count.[5] Whether the source code itself was tangible or intangible property was irrelevant to the appellate court. Instead, it found that Mr. Aleynikov made a "tangible reproduction or representation" when he uploaded the source code to the German server because "when he copied it onto the server's 'physical' hard drive[,] it took up 'physical space' and was 'physically present." With regard to the term "appropriate," defined in the New York Penal Law generally for all larceny offenses, the appellate court considered the portion of the definition that indicated that "[t]o 'appropriate' property of another to oneself or a third person means (a) to exercise control over it, or to aid a third person to exercise control over it, permanently . . . ."[6] The appellate court focused on Mr. Aleynikov's intent with regard to the copy he had made of the secret scientific material, finding that there was no evidence that he had intended to return the copy, and therefore had appropriated it.
Against this backdrop, the New York Court of Appeals accepted review to consider whether Mr. Aleynikov had made a "tangible reproduction or representation of [Goldman's HFT source code] by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material," and whether he had intended to appropriate the use of that source code. It answered both questions in the affirmative.
The first issue the Court faced was what the term "tangible" meant in the context of the unlawful use statute. The Court reviewed the background of the statute (which arose out of concerns that the conduct in a Federal case, United States v. Bottone, 365 F.2d 389 (2d Cir. 1966), might not be prohibited under New York law), but then noted that the term "tangible" is not defined in the Penal Law. It noted that dictionaries could provide "useful guideposts" for determining the ordinary meaning of statutory terms; indeed, both the prosecution and Mr. Aleynikov had proposed definitions from Black's Law Dictionary for the interpretation of the word "tangible." Mr. Aleynikov had suggested that it meant "capable of being touched," the State had argued that it meant "having or possessing physical form."
The Court of Appeals rejected Mr. Aleynikov's proposed definition in two steps. First, it asserted that, if construed that way, "the term does not apply to ink printed on paper any more readily than to source code, and provides no workable criterion." Second, it indicated that the question was not whether source code was tangible (and, to conform with prior cases, the Court was constrained to agree that source code is intangible), but whether a copy of that source code would be tangible when downloaded. Thus, the Court sought to distinguish between source code generally and a copy of source code taking up physical space on a hard drive or CD.
The Court's position is curious, and appears to be based on a limited computer literacy. The Court's first statement is odd, as there is no doubt that paper with printed indicia can be touched by hand. On the other hand, virtual (that is, not printed) source code is not stored in the same format as it is printed; it is saved as binary code. Therefore, it cannot be touched as compiled source code, even on a microscopic level. There is a clear distinction that, while perhaps intellectually unsatisfying, is easy to police. Second, even before it is saved, computer code takes up physical space (whether in memory or saved on media). That is, the Court of Appeals makes a distinction where there is no difference.
Notably, the Court struggles to provide any meaning to the term "tangible" in the phrase "tangible reproduction or representation." It posits the example of memorization of source code, but notes that such memorization would not fall under the statute because the reproduction or representation must be "by means of writing, photographing, drawing, mechanically or electronically reproducing or recording." It circumvents the conundrum by stating, "the word 'tangible,' as we interpret it, does not introduce redundancy; it adds a modest element to 'reproduction,' serving to emphasize that the crime consists in making a physical, not a mental, copy of secret scientific material." But that "emphasis," in light of the requirement of certain means for making the reproduction, is redundancy.
The Court then gets to the heart of its objection to Mr. Aleynikov's position, stating that "it would be absurd to suppose that the statute criminalizes photographs stored on film but not ones stored on a hard drive." But that absurd result is for the legislature to prevent through an amendment of the statute, not the Court to fix through interpretation.[7] The unlawful use statute was adopted in 1967, long before the internet was in common use. The legislature had not yet criminalized computer crime specifically, and would not do so for almost two more decades. And even now, there is a package of legislation proposed that would remedy the absurd juxtaposition noted by the Court.
The Court of Appeals made short work of Mr. Aleynikov's second argument, that he did not intend to appropriate the relevant source code because he did not intend to deprive Goldman Sachs of the source code. In doing so, it disaggregated the definition of "appropriate": under the New York Penal Law, "[t]o 'appropriate' property of another to oneself or a third person means (a) to exercise control over it, or to aid a third person to exercise control over it, permanently or for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit, or (b) to dispose of the property for the benefit of oneself or a third person."[8] The Court asserted that the definition was intended to indicate that control could be exercised (i) permanently or (ii) for so extended a period or under such circumstances as to acquire the major portion of its economic value or benefit. From that, it surmised that exercising permanent control over another's property would be sufficient, and asserted that Mr. Aleynikov intended to exercise control over the source code permanently, since he admittedly did not intend to return the copy of source code in his possession.
The Court's resolution of the appropriation issue is ironic, as it elides the distinction between the source code and the copy of the source code it made in relation to "tangible reproduction or representation. That is, Mr. Aleynikov certainly intended to keep the copy of source code he had made, but had no intent to control Goldman Sachs's use of its own copy of the source code. But the Court did not address the inconsistency between the two interpretations.
While the Court of Appeals was clearly bothered by the prospect of Mr. Aleynikov getting off on a "technicality," it substantially expanded the unlawful use statute to do so. Of course, the language of a statute is not a technicality. But the Court interpreting the statute extremely broadly is likely to chill behavior that the legislature did not intend to criminalize. There is always tension between preventing harm to intellectual property owners and allowing employees freedom to move from job to job; the New York Court of Appeals drew the line far more to employers' liking because of the hard facts of the case. In truth, that should have been the legislature's job.
[1] For more details on Mr. Aleynikov’s conduct and prosecutions, please see the Patent Docs posts "Another Aleynikov Trade Secrets Case Ends with Narrower Statute" and "Aleynikov Conviction Reinstated by New York Appellate Court," as well as the Snippets article "New York v. Aleynikov: New York State's Penal Code (Like Federal Criminal Law) Does Not Cover Electronic Reproduction of Source Code."
[2] The Economic Espionage Act is found at 18 U.S.C. § 1832 and the National Stolen Property Act is found at 18 U.S.C. § 2314.
[3] United States v. Aleynikov, 676 F.3d 71, 76-79 (2d Cir. 2012).
[4] See N.Y. Pen. L. § 165.07 ("A person is guilty of unlawful use of secret scientific material when, with intent to appropriate to himself or another the use of secret scientific material, and having no right to do so and no reasonable ground to believe that he has such right, he makes a tangible reproduction or representation of such secret scientific material by means of writing, photographing, drawing, mechanically or electronically reproducing or recording such secret scientific material.").
[5] New York v. Aleynikov, 148 A.D. 3d 77 (N.Y. App. Div. [1st Dept.] 2017).
[6] N.Y. Pen. L. § 155.00[4].
[7] For example, after the Second Circuit reversed Mr. Aleynikov's conviction under the Economic Espionage Act, Congress moved quickly to amend the statute to cover future abuses of the same sort. Pub. L. 112-236.
[8] N.Y. Pen. L. 155.00[4].
Interesting article.
How would this (or how would this not) collide with the various "views" as to "fixed in a tangible medium" (as a requirement to obtain copyright protection) or "electronic media are not manufactures (as an offshoot of the In re Nuitjen case for the patent angle)? Further, isn't there a Supreme Court case that may be impacted (considering whether or not COPIES of a Gold Master impacted that Gold Master, its use, or other deliberations, again, in a patent context).
Posted by: Skeptical | May 14, 2018 at 12:14 PM
I doubt that stock trading is what the legislature had in mind when they defined "secret scientific material" as and article, material, or device that "constitutes, represents, evidences, reflects, or records a scientific or technical process, invention or formula." N.Y. Pen L. § 155.00[6]
Nonetheless, least in NY, it seems that software per se is "scientific or technical." For purposes of U.S. patent law, yeah, not so much.
Posted by: Jim Demers | May 16, 2018 at 12:09 PM
Mr. Demers,
Where in the law written by Congress is this "technical" notion (albeit in your presentation, a "scientific" technical notion?)
Have you ever heard of the science of business as advanced by the likes of Deming? Would you deny that type of innovation wholesale? On what basis?
Posted by: skeptical | May 17, 2018 at 06:20 AM