Bits, Tangibility and the National Stolen Property Act

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After he was charged with “damaging a protected computer in violation of 18 U.S.Code §§ 1030(a)(5)(A) and 1030(c)(4)(A)(i)(I) (`Count I’), and violating the National Stolen Property Act (`NSPA), 18 U.S. Code §2314 (`Count II’)”, Yijia Zhang filed a motion to dismiss Count II.  U.S. v. Yijia Zhang, 2014 WL 199855 (U.S. District Court for the Eastern District of Pennsylvania 2014).  He filed the motion pursuant to Rule 12(b)(3)(B) of the Federal Rules of Criminal Procedure.  U.S. v. Yijia Zhang, supra.

This according to the opinion, is how Zhang came to be prosecuted:

Zhang worked as a computer systems manager for `Company A’ until July 6, 2010. . . . On June 28, 2010, Zhang copied approximately 6,700 of Company A's confidential files from an unspecified location on Company A's internal network to the desktop computer provided to Zhan g by Company A. . . .

Zhang then transferred some or all of these files from his computer to one of Company A's servers (the `Server’). . . . The copied and transferred files contained `sensitive information regarding the operation and development of Company A's computer network.’ . . . Two days later, on June 30, 2010, Zhang gave Company A written notice that his last day with the company would be July 6, 2010. . . .

On Saturday, July 3, 2010, Zhang copied approximately 2,800 more confidential files from Company A's network to his desktop computer. . . . On Sunday, July 4, 2010, Zhang copied roughly 300 more confidential files to his computer. . . . Zhang then transferred some or all of the confidential files that he had accumulated on his desktop computer that weekend to the Server. . . .

Next, Zhang established an Internet connection between the Server and Internet storage sites in Sweden and Germany that Zhang maintained. . . . Zhang then used this connection to transfer an unspecified number of Company A's confidential files to the Internet storage sites. . . . After completing this transfer, Zhang covered his digital tracks by deleting unspecified files from the Server. . . . The deletion of these files eliminated evidence of Zhang's transfers and prevented the Server from functioning as intended. . . .

U.S. v. Yijia Zhang, supra.  If you are interested, you can find the indictment against Zhang here.

The U.S. District Court judge who has the case began his ruling on Zhang’s motion to dismiss by explaining that Rule 7(c)(1) of the Federal Rules of Criminal Procedure

provides that an `indictment . . . must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.’ `A facially sufficient indictment (1) contains the elements of the offense intended to be charged, (2) sufficiently apprises the defendant of what he must be prepared to meet, and (3) allows the defendant to show with accuracy to what extent he may plead a former acquittal or conviction in the event of a subsequent prosecution.’ U.S. v. Stock, 728 F.3d 287 (U.S. Court of Appeals for the 3d Circuit 2013). . . .

`Under Rule 12(b)(3)(B), a defendant may contest the sufficiency of an indictment on the basis that it fails to state an offense . . . [because] the specific facts alleged fall beyond the scope of the relevant criminal statute, as a matter of statutory interpretation.’ U.S. v. Stock, supra (internal quotation marks omitted). A district court evaluates a challenge under this Rule by `determining whether, assuming all of those facts as true, a jury could find the defendant committed the offense for which he was charged.’ U.S. v. Huet, 665 F.3d 588 (U.S. Court of Appeals for the 3d Circuit 2012).

U.S. v. Yijia Zhang, supra. 

He also explained that federal crimes are

`solely creatures of statute.’ Dixon v. U.S., 548 U.S. 1 (2006). `Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose.' Gross v. F B L Fin. Servs., Inc., 557 U.S. 167 (2009) (quotation marks omitted).

The Supreme Court instructs that `ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.’ Jones v. U.S., 529 U.S. 848 (2000). Accordingly, `when choice has to be made between two readings of what conduct Congress has made a crime, it is appropriate, before [the Court] choose[s] the harsher alternative, to require that Congress should have spoken in language that is clear and definite.’ Jones v. U.S., supra.

U.S. v. Yijia Zhang, supra. 

The judge then noted that the National Stolen Property Act (NSPA) makes it a crime for

a person to `transport[ ], transmit[ ], or transfer[ ] in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted or taken by fraud.’ 18 U.S. Code § 2314. The digital files at issue in this case are neither securities nor money. . . . 

Thus, to survive Zhang's motion to dismiss, the indictment must allege: (1) that Zhang transported, transmitted, or transferred goods, wares, or merchandise in interstate or foreign commerce; (2) that those goods, wares, or merchandise had a value of $5,000 or more; and (3) that Zhang knew `the same’ to have been stolen, converted, or taken by fraud. . . .

U.S. v. Yijia Zhang, supra. 

In his motion to dismiss, Zhang argued that the indictment failed to state an offense

for two reasons. First, Zhang argues that t he Indictment fails to allege that `the stolen item was in some tangible or physical form’ when it was stolen. . . . Second, Zhang argues that the Indictment fails to allege the existence of a market for the confidential information stolen by Zhang. . . .

U.S. v. Yijia Zhang, supra. 

The judge therefore found that Zhang’s arguments required him to “determine whether the NSPA requires the government to make these allegations, and, if it does so require, whether the government makes these allegations in the Indictment.” U.S. v. Yijia Zhang, supra.  He began with the first issue:  whether “the NSPA includes a tangibility requirement”.  U.S. v. Yijia Zhang, supra. 

In 1985, in Dowling v. U.S., 473 U.S. 207, the Supreme Court addressed whether the

NSPA criminalizes the `interstate shipments of bootleg and pirated sound recordings and motion pictures whose unauthorized distribution infringed valid copyrights.’ Dowling v. U.S., supra. The indictment. . . . alleged that the `unauthorized use of the musical compositions rendered the phonorecords “stolen, converted or taken by fraud” within the meaning of the [NSPA].’  Dowling v. U.S., supra. Thus, the Supreme Court decided whether the NSPA criminalizes the interstate shipment of bootleg records where nothing tangible was stolen, converted, or taken by fraud.

The Supreme Court began . . . by noting that the text of the NSPA does not plainly cover the interstate shipment of bootleg records for two reasons. First, copyrighted works are not obviously goods, wares, or merchandise. The Court explained that the NSPA `seems clearly to contemplate a physical identity between the items unlawfully obtained and those eventually transported’ by `requiring that the “goods, wares, [or] merchandise” be “the same” as those “stolen, converted or taken by fraud”.’ Dowling v. U.S., supra (quoting 18 U.S. Code § 2314). . . . Second, the Court noted that `interference with copyright does not easily equate with theft, conversion, or fraud.’ Dowling v. U.S., supra. . . . `[I]nfringement plainly implicates a more complex set of property interests than . . . theft, conversion, or fraud.’ Dowling v. U.S., supra. 

. . . The Court found Congress's purpose in enacting the NSPA was to `assist the States' efforts to foil the “roving criminal,” whose movement across state lines. [It] reasoned that `the need to fill with federal action an enforcement chasm created by limited state jurisdiction . . . simply does not apply to’ interstate shipment of `merchandise whose contraband character derives from copyright infringement’ because `Congress has the unquestioned authority to penalize directly the distribution of goods that infringe copyright, whether or not those goods affect interstate commerce.’ Dowling v. U.S., supra.  

The Court concluded that the NSPA does not `plainly and unmistakably’ apply to the interstate shipment of bootleg records. Dowling v. U.S., supra. [It therefore] reversed the defendant's conviction under the `time-honored interpretive guideline that ambiguity concerning the ambit of criminal statutes should be resolved in favor of lenity.’ Dowling v. U.S., supra. 

U.S. v. Yijia Zhang, supra.  The judge noted that the U.S. Circuit Courts of Appeals “for the 1st, 2nd, 7th, and 10th Circuits have concluded that only tangible property can constitute goods, wares, or merchandise” under the NSPA. U.S. v. Yijia Zhang, supra. 

He explained that the prosecution “urges us to decide that the NSPA includes no tangibility requirement” and that “Dowling does not compel a contrary conclusion for two reasons.”  U.S. v. Yijia Zhang, supra. 

First, the government argues Dowling did not hold that the NSPA requires `a physical identity between the items unlawfully obtained and those eventually transported, and hence some prior physical taking of the subject goods’ . . . because that language is dictum. . . .

The government explains that Dowling merely `held that what the defendant transported across state lines -- the physical records -- was not the “the same” as the thing that he had taken-the copyright holder's statutory right to limit and license copying.’ . . . We agree. But, dictum or otherwise, the Supreme Court noted that the `common-sense meaning of the statutory language’ limits application of the NSPA to `physical “goods, wares, [or] merchandise” that have themselves been ‘stolen, converted or taken by fraud.’ Dowling v. U.S., supra (quoting 18 U.S. Code § 2314). We find this analysis to be highly persuasive. . . .

Second, the government argues that any `tangibility requirement was removed when Congress amended the [NSPA] in 1988.’ . . . That year, Congress amended the NSPA by `striking “transports” and inserting “transports, transmits, or transfers.”’ Anti–Drug Abuse Act of 1988, Pub.L. No. 100–690, 102 Stat. 4181 (1988). 

It is unclear whether this change removed any tangibility requirement. On the one hand, the new verbs -- transmits and transfers -- might apply only to the nouns `securities’ and `money,’ which are readily transmitted and transferred in digital form.  On the other hand, the addition of these verbs might signal that the NSPA now criminalizes the theft of goods, wares, or merchandise that can be transmitted or transferred in digital form.

U.S. v. Yijia Zhang, supra. 

Ultimately, the judge found that the NSPA is “ambiguous” as to whether stolen

`goods, wares, and merchandise’ must take a physical form. The 3rd Circuit directs that the ordinary meaning of goods, wares, and merchandise is `personal property or chattels’ that are `ordinarily a subject of commerce.’ U.S. v. Seagraves, 265 F.2d 879 (1959).  Based on this precedent, we think the most natural reading of `goods, wares, and merchandise’ is personal property or chattels that `have some sort of tangible existence.’ U.S. v. Smith, 686 F.2d 234 (U.S Courtof Appeals for the 5th Circuit 1982). . . . 

This interpretation fits best with the statutory requirement that the goods, wares, or merchandise transported in interstate or foreign commerce be the same as the goods, wares, or merchandise stolen, converted, or taken by fraud; and is consistent with the approaches taken by every Court of Appeals to consider the issue.

The government's contrary position is not unreasonable. In this digital era, we think that intangible products could reasonably be understood to constitute personal property that is ordinarily the subject of commerce. . . . However, the government's position merely demonstrates that there is some ambiguity surrounding the NSPA's reach.

U.S. v. Yijia Zhang, supra. 

The judge therefore held that to state an offense under the NSPA, the indictment must

allege that Zhang transported, transmitted, or transferred something that had been stolen, converted, or taken by fraud while in a tangible form. The value of that object may derive from intangible information contained within the item; but without a physical manifestation, the stolen property is not goods, wares, or merchandise within the meaning of the NSPA.

U.S. v. Yijia Zhang, supra. 

The judge then took up the other issue:  whether the indictment alleged the information Zhang stole “`ever took physical form.’”  U.S. v. Yijia Zhang, supra.  Zhang pointed out that, “`the Government alleges that Mr. Zhang transferred electronic files over the internet from a network to a server.’” U.S. v. Yijia Zhang, supra. 

The government responds that `storage of information in digital format on a server, a computer hard drive, or a disk is just as physical as the storage on a piece of paper.’ . . . The government [claims] the Indictment satisfies any tangibility requirement because `the material had a physical embodiment on the servers of Company A’ and on Zhang's `storage space in Europe.’

U.S. v. Yijia Zhang, supra. 

The judge then explained that he agreed with the prosecution that information stored

in computer hardware has a physical manifestation. . . . If the government had accused Zhang of stealing some part of Computer A's server that stored propriety information, we would have had little difficulty concluding that the tangibility requirement were satisfied. . . . But . . . the government accuses Zhang of stealing information by transmitting that information over the Internet. This transmission was . . . the act that rendered the digital files stolen, and the act that the government argues violated the NSPA.

The government has not alleged, as it must, that the digital files transmitted by Zhang had been stolen, converted, or taken by fraud while in a tangible form. Bits transmitted over the Internet are intangible information falling outside the NSPA's ambit. Accordingly, the government has failed to state an offense under the NSPA.

U.S. v. Yijia Zhang, supra. 

He therefore granted Zhang’s motion to dismiss Count II of the indictment.  U.S. v. Yijia Zhang, supra.