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112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     112-610

======================================================================



 
     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:
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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:
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \5\Id. at p. ii.

---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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, 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
confront and counter three activities:

        1) cyber-enabled espionage;

        2) insider threats; and

        3) espionage by China, Russia and Iran.\8\
---------------------------------------------------------------------------
    \8\Id.

---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \9\Id.

    In explaining the threat posed by cyber intrusions, the DNI 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \13\The EEA is codified at 18 USCSec. Sec. 1831-1839.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \15\Id. at p. 1
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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

---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \19\Ibid. 14, at 5
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \20\Id. at 3
    \21\Id. at 5
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \22\Ibid. 1, at 4
    \23\Id.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \24\Ibid. 14, at p. 6
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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.

           *       *       *       *       *       *       *