IN 1994, an employee of Ellery Systems Inc., a small Colorado firm, allegedly stole proprietary software codes and sold them to China for $550,000. After uncovering the theft, company officials called the FBI, which arrested the employee and a number of co-conspirators. All of them confessed. Open and shut case, right?
Federal prosecutors dropped the case, while Ellery was forced to close because it had lost the trade secrets that had augured commercial success. In the click of a mouse, a competitor had obtained knowledge the firm had taken years to develop.
Ellery was a victim of a legal gap that federal officials say is costing US companies billions of dollars and thousands of jobs: There are no federal statutes that specifically outlaw the theft of ideas and innovations used to produce advanced technologies. US law is not keeping pace with technological change, they say.
The loophole has contributed to an explosion in economic espionage against the United States that officials view as a threat to national security and American domination of the huge global market in technologies ranging from computer chips to medical equipment.
Armed only with barely applicable laws on mail fraud and the transportation of stolen goods, federal prosecutors have been unable or unwilling to go after thieves working for foreign companies, hostile states, and friendly governments.
Current patent, copyright, and trademark laws are often ineffective because they do not cover the theft of such items as corporate sales strategies, the formulas or computer codes for products not yet patented, and blueprints for technologies still in development.
Efforts have now started in Washington to give law enforcers the tools they need for a crackdown. Senate Republicans have introduced at least three bills that would make economic espionage and the theft of intellectual property federal crimes. Joint hearings opened last month on the issue by the Senate Judiciary and Intelligence Committees are to resume once the Clinton administration introduces its own proposed legislation.
''If this statute were passed it would ... help our investigations immensely,'' says Robert Bryant, the head of the FBI's National Security Division. ''What that will do is level the playing field.#''
A lack of industrial espionage laws has hamstrung hundreds of FBI investigations involving the intelligence services of at least 23 countries, says Mr. Bryant. About half those countries are unfriendly states and the rest are friends and close allies.
''Our investigations have gone up 800 percent since we started this issue basically in 1994,'' says Bryant. While US allies and friendly nations generally seek data on specific technologies, ''hostile intelligence services are almost vacuum cleaners,'' he says.
Foreign intelligence services either pay employees of US companies for trade secrets or coopt them into stealing for them, Bryant says. Foreign ''experts'' sent to work for American firms under official exchange programs may be agents under orders to pilfer secrets.
THOUGH US officials refuse to identify them, unfriendly countries involved in espionage against US companies are known to include Iran and China. Sen. William Cohen (R) of Maine, the sponsor of one of the Senate bills, says France, Germany, Japan, and South Korea are among the friendly states that have ''systematically practiced'' economic espionage against US firms. Russia is also believed to be pursuing an extensive economic espionage effort against the US.
''Unlike the politico-military espionage of the cold war, economic espionage pits friendly nations against each other,'' Senator Cohen said in introducing his measure in January. ''The direct costs of this espionage is borne by America's international corporations. The indirect costs are borne by the American economy as a whole. Jobs and profits are lost; the competitive edge is stolen away.''
A report to be published this week by the American Society of Industrial Security (ASIS) provides an alarming measure of how serious the problem has become.
In a survey of 325 US corporations, the study found 219 known cases of actual or attempted espionage in the first half of 1995. That represents an average of 32 cases per month, a 323 percent increase over 1992, when the monthly average was 9.9 cases.
Perhaps the report's most disturbing finding is that 74 percent of the known 1985 cases involved people who had relations of trust with the companies. Fifty-nine percent were current or former employees, temporary workers, or retirees. The other 15 percent involved partners, suppliers, or consultants.
Richard Heffermen, a corporate security consultant and co-author of the report, says not all ''insiders'' work for foreign intelligence services or firms. Many are motivated by the instability created by corporate downsizing, he says. Workers who fear they will lose their jobs or believe they are poorly paid may steal technical secrets to sell for profit or parlay into better jobs with their firms' competitors.
Unlike its foreign counterparts, the Central Intelligence Agency is forbidden from stealing foreign corporate secrets and turning them over to US firms. But, it does watch for foreign firms using illegal means to undercut their US rivals.