U.S. v. Hager, 5th Circuit, filed 1/5/18: Fraud and Confidential Business Information
Private business information taken by the defendant to profit deemed confidential business information which created a property right created by the mail and wire fraud statutes.
The defendant, Hager, worked for Velocity Electronics, a company which distributed computer parts in Austin, Texas. By wrongfully using Velocity’s confidential information, Hager profited $1.16 million over the course of 4 years. Hager set up a fake company and sold computer parts from this fake company to Velocity, who then sold it to its clients. Velocity had a ‘fail’ point to ensure a 20% profit on all its sales. The formula by which Velocity arrived at this mark was confidential, as was the fact that Velocity used a fail point. By using the information Hager had access to, he ensured the products from his fake company were sold to Velocity to assure them the net profit he wanted. Eventually, he was caught when one of his co-workers looked up the company on-line and saw it was registered in Hager’s wife’s name, using their home address. He was charged and convicted of mail, wire and tax fraud, and money laundering.
The court rejected Hager’s arguments and affirmed his conviction. Hager argued that the wire and mail fraud charges no longer protect confidential business information under the statute after Skilling v. the United States, 561 U.S. 358 (2010). He also argues that even if the Court believed confidential business information was protected, that only referred to trade secrets. He further argued that the indictment failed to allege an offense and, in the alternative, that the evidence presented was insufficient to support a conviction.
The Court relied on Carpenter v. the United States, 484 U.S. 19 (1987) to uphold the verdict. There, a business reporter for the Wall Street Journal had been charged with the same crimes Hager faced. The journalist had been accused of divulging the contents of his regular finance column to stockbrokers prior to publication. The journalist argued that the paper’s interest in the column was an ‘intangible right’ and so the statute did not apply. The Court disagreed, holding that the content was, in fact, confidential business information, and was property – even though it was ‘intangible.’
Carpenter is directly on point here – Velocity’s information was confidential, stored and analyzed by the company’s proprietary, in-house software, and was crucial to run Velocity’s business. Velocity had an interest in keeping this information private and required their employees to sign several confidentiality agreements. Thus, the information in question was confidential, creating a property right and qualifying for protection under the mail and wire fraud statutes.
The Court dismissed Hager’s argument that Skilling applied, saying the issue there concerned an “intangible right of honest services.” Court held that Skilling actually broadened the existing statutes, including protections for both property rights and the intangible right of honest services. The Court never explicitly overruled Carpenter, and each case involves distinctive rights protected by the wire and mail fraud statutes.
Hager’s argument that only trade secrets as defined by state law are protected under the statute also failed. The Court found there was insufficient authority to support this assertion. The Court also rejected the rest of Hager’s arguments in turn:
- His wife was not entitled to be granted immunity, and there was no evidence of government abuse from failing to do so.
- The court refused to allow testimony from an expert comparing a similar lawsuit involving Velocity, wherein they were accused of taking propriety information. The trial court denied the admission based on relevance and hearsay grounds. The Court found no reversible error, finding the evidence of a prior criminal prosecution of Velocity was, at best, tangential. Hager was allowed to cross-examine witnesses on the previous lawsuit concerning confidentiality and for impeachment – but he failed to do so.
- Hager moved to sever tax fraud counts under Federal Rule of Criminal Procedure 14, which was denied. The denial of a motion to sever is reviewed using ‘exceeding deference’ to the trial court’s decision, and there must be evidence that failure to do so caused an unfair trial. Severance remains in the sound discretion of the trial court. His grounds for requesting severance based on fear that cross-examination of a witness would elicit compromising evidence was not compelling. The sole purpose of cross-examination is to impeach witnesses – therefore, this ‘prejudice’ was neither extraordinary nor warranted severance.
The Court, in this opinion, maintained its broad interpretation of information that is subject to the protection of mail and wire fraud statutes. A good case to know in this exceedingly complex area.