A new way to prosecute Economic Espionage? Section 19 of the Security of Information Act, and the new “Trade Secrets” Offence
18 November 2020
In late 2018, David Vigneault, Director of the Canadian Security Intelligence Service (CSIS), told members of the Economic Club of Canada that espionage, and in particular state sponsored economic espionage, represented a “long term threat to Canada’s economy and to our prosperity”. Economic espionage is clandestine or unlawful activity sponsored or coordinated by a foreign power. This activity is designed to influence sensitive economic policy decisions, obtain sensitive economic policy information, manipulate proprietary economic information (including trade secrets) or copy critical technologies.
The potential scope of the threat is considerable; while quantifying the damage done by state-sponsored economic espionage to the Canadian economy is difficult, the estimated impact of trade secret theft alone on the American economy in 2015 was $180 billion per year. [1] Canada’s economy does not match that of the US, but in global terms its economic strength, development of cutting edge technology, and vast resource wealth makes it a target for economic espionage in general and the misappropriation of trade secrets in particular.
CSIS indicated in a 2019 Public Report that some economic espionage occurs via corporate acquisitions of Canadian companies by foreign state-owned enterprises or private firms with close ties to foreign governments.[2] Subsections 14.1 (1.1) and (2) and Part IV.1 of the Investment Canada Act (ICA), establish certain safeguards against this kind of acquisition. These safeguards appear to be increasingly inadequate: the 2019 Report indicates that economic espionage continues to increase in breadth, depth and potential economic impact, and that hostile foreign intelligence services and individuals working with the support of foreign states continue to attempt to gather economic information in Canada.[3]
Canada’s approach to economic espionage is ripe for change; Director Vigneault’s statement was characterized by Professor Stephanie Carvin as a “rebalancing” of CSIS priorities following a focus on anti-terrorism after 2001. [4] Given the scope of the threat and continued attempts by foreign intelligence to conduct economic espionage despite the safeguards established under the ICA, criminal sanctions for economic espionage warrant examination. While economic espionage has been criminal in Canada since 2001 under section 19 of the Security of Information Act (SIA), no prosecutions of economic espionage under this provision have taken place. This post proposes several reasons why no prosecutions under section 19 have occurred, and concludes that while the new “Trade Secrets” offence created in section 391 of the Criminal Code offers several advantages over section 19, it does not yet rise to meet the “threat” identified by Director Vigneault.
1. Background
The Security of Information Act was created by the 2001 Anti-Terrorism Act (ATA) as a replacement for the 1981 Official Secrets Act, Canada’s cold-war era security legislation which did not specifically criminalize economic espionage. While the ATA was enacted in the shadow of the September 11th attacks, the reforms of the SIA in particular took place in the context of the passage of the 1996 Economic Espionage Act (EEA) in the United States. The EEA not only outlawed the communication of trade secrets which could harm the United States, but also criminalized the “theft” of trade secrets between private parties.
2. Why has section 19 never been used?
There are four major obstacles to the prosecution of economic espionage under section 19 of the SIA.
2.1 The “Foreign Economic Entity” Requirement is too restrictive.
The first of these obstacles is section 19’s requirement that a person must communicate or otherwise obtain, retain, alter or destroy a trade secret “for the benefit of, or in association with a foreign economic entity”. A “foreign economic entity” is defined as a foreign state or group of foreign states, or an entity that is controlled or substantially owned by a foreign state or a group of foreign states. Though control or substantial ownership is not defined in the act, similar provisions in American law provide some guidance as to how it could be applied.
Much like section 19 of the SIA, section 18 USC 1831 , one of the two offences enacted by the American EEA, also contains a requirement that an accused act for the benefit of “any foreign government, foreign instrumentality, or foreign agent”. The definition of “foreign instrumentality” encompasses any entity that is “substantially owned, controlled, sponsored, commanded, managed or dominated by a foreign government”. Though similar to the SIA’s definition of a “foreign economic entity”, the control element is more developed in American practice; the key inquiry under section 1831 is whether the activities of an entity are foreign government directed. In US practice, proving that a foreign instrumentality is directed by a government requires significant investigation into the structure and function of the instrumentality as well as its relationship with a foreign government.[5]
Establishing the necessary nexus between an accused and a foreign government is further complicated by modern espionage tactics. Foreign state actors often take steps to hide their state-sponsored nature, including joint ventures, direct investment, shell corporations and other intermediaries. “Spoofing” can sever the link between an actor and a state benefitting from access to a trade secret. The use of botnets to commit cyber economic espionage as well as cloud storage of data in disparate locations may require prosecutors to request assistance from multiple countries via mutual legal assistance treaties, which can be slow at best and largely ineffective in cases where the requested state is involved in the economic espionage. As a result, even countries like the United States with a comparatively developed body of economic espionage law find demonstrating the necessary relationship between an entity and a foreign government difficult; between 1996 and 2016, only six convictions under section 1831 were obtained in the United States. [6] Prosecutions under section 1831 are much more difficult in comparison to prosecutions for the “theft” of trade secrets under section 1832 of the US’s EEA, which do not require a “foreign instrumentality”. Given these legal challenges and the disparity in investigative resources, demonstrating that an entity is sufficiently controlled or substantially owned by a foreign state in the Canadian context is likely to be at least as difficult as establishing a foreign instrumentality under US section 1831.
2.2. The “Detriment of Canada’s Interests” Requirement is too vague.
The second condition under section 19 of the SIA is that any misuse of a trade secret must be “to the detriment of Canada’s economic interests, international relations or national defence or national security”. This language differs from the activities which are held to be “prejudicial to the safety or interests of the state” in section 3 of the SIA. As a result it is uncertain whether any, some or all of the actions contained in section 3 are sufficient to establish a detriment to Canada’s interest. Establishing a detriment to Canada’s interests independently of section 3 is a daunting task; the prosecution would need to establish Canada’s “economic interests”, which risks turning a criminal trial into a policy debate.
2.3 Corporate Reluctance
Another obstacle to successful prosecution of economic espionage is the potential lack of support from the private sector. A firm’s decision to report the compromise of trade secrets is critical to any potential prosecution.[7] Firms may not realize that a data breach has resulted in the misappropriation of their trade secrets. Even where a breach is detected, identifying the culprits can also prove difficult.[8] Trade secret holders face risks in disclosing the compromise of a trade secret, including a loss of competitive advantage, deterioration of goodwill and devaluation of stock. [9] Firms may perceive disclosure requirements associated with prosecution as threatening the protection afforded by trade secret law.[10] While the American EEA mandates that courts take action to preserve the confidentiality of trade secrets during EEA litigation, no such provision exists with respect to prosecutions under section 19 of the SIA. Without legal and procedural protections for trade secrets and incentives to co-operate, Canadian industry is unlikely to provide information vital to the prosecution of economic espionage.
2.4 Alternative Legal Avenues.
When faced with the unauthorized transmission of intellectual property or other activities which resemble economic espionage, Canadian prosecutors have on at least one occasion relied on other criminal provisions such as the Criminal Code’s breach of trust offence. Even when misappropriation of a trade secret engages national interests, prosecutors may find it simpler or more effective to allow owners of trade secrets to seek redress in the civil courts through claims for breach of confidence, breach of fiduciary duty, or breach of contract by virtue of a non-disclosure agreement.[11] However, enforcement of judgments obtained as a result of a successful claim can be difficult or impossible where foreign competitors treat Canadian courts with contempt.
3. The future
Given these obstacles to successful prosecution under section 19, it is not surprising that some commentators in the early 2010’s called for the criminalization of trade secret “theft” in Canada similar to section 1832 of the US’s EEA . These calls were answered on March 13th, 2020, when Bill C-4 (implementing the Canada-United States-Mexico Agreement – “CUSMA”) was given Royal Assent. Bill C-4 modifies the Criminal Code through the addition of a Trade Secret offence under section 391.
While section 391 shares most elements with section 19 of the SIA, it contains neither a “foreign economic entity” requirement nor the condition that the misuse of trade secrets be to the “detriment of Canada’s interests”, two of the main obstacles to successful prosecution under section 19 of the SIA. Section 391 also replaces the 10-year maximum sentence under section 19(2) of the SIA with a 14-year maximum sentence under section 391(3).
Despite these developments, section 391 fails to address two of the same drawbacks associated with section 19 of the SIA. First, section 391 does not require courts to protect the confidentiality of trade secrets. As a result, corporations are still likely to view the disclosure necessary to establish criminal culpability as a risk until case law confirms the rights of trade secret holders to seal those secrets in criminal courts. Second, section 391 will serve no good if it is ignored by prosecutors in favor of civil remedies like section 19 of the SIA.
Given the magnitude of the threat identified by Director Vigneault, criminal prosecution of offenders must play a role in securing Canada’s economic interests, and these two remaining obstacles must be overcome. Section 391 came into force with CUSMA on July 1, 2020, and now forms part of the Criminal Code (though the Department of Justice website does not yet reflect this change as of writing). Prosecutors should be funded, trained and encouraged to pursue charges under section 391 where the misappropriation of trade secrets engages Canada’s interests. Likewise, courts should make use of publication bans to protect the identity of trade secret holders and the confidentiality of trade secrets.
Endnotes
[1] US, Commission on the Theft of American Intellectual Property, The Theft of American Intellectual Property: Reassessments of the Challenge and United States 2017 Report, (Washington, DC: US Government Printing Office, 2017) at 11.
[2] Canadian Security Intelligence Service, 2019 CSIS Public Report, (Ottawa: Public Works and Government Services Canada, 2020) at 17 [2019 CSIS Report].
[3] 2019 CSIS Report at page 16.
[4] Stephanie Carvin and Craig Forcese, Intrepid Podcast, “A Christmas Stocking of National Security Reports” at 4:00 to 5:20.
[5] Thomas Reilly, "Economic Espionage Charges under Title 18 U.S.C. Sec. 1831: Getting Charges Approved and the Foreign Instrumentality Element" (2009) 57:5 United States Attorneys' Bull 24 at 25.
[6] Melanie Reid, “A Comparative Approach to Economic Espionage: is any Nation Effectively Dealing with this Global Threat” (2016) 70 Univ Miami Law Rev 757 at 770-771 [Reid].
[7] Arin Basuchoudhary and Nicola Searle, “Snatched secrets: Cybercrime and trade secrets modelling a firm’s decision to report a theft of trade secrets” (2019) 87 Comput Ser 101591 at 3.
[8] Zoe Argento, “Killing the Golden Goose: The Dangers of Strengthening Domestic Trade Secret Rights in Response to Cyber-Misappropriation” 16 Yale JL & Tech 172 (2014) at 215 [Argento].
[9] Argento at 216.
[10]Argento at 217.
[11] Emir Crowne & Tasha De Freitas, "Canada's Inadequate Legal Protection against Industrial Espionage" (2013) 13:1 Chicago-Kent J of Intellectual Property 192 at 198.